A Look Into A Small Cap Contrarian Value Approach


A Look Into A Contrarian Value Approach by Jay Kaplan, The Royce Funds

Portfolio Manager Jay Kaplan discusses his contrarian value investment approach and how he finds bargains in the small-cap market.

See the video here.

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What is a contrarian value investment approach?

I like to call what I do a contrarian value approach but what does that mean? What do I think that means? Well, let’s talk about contrarian and then we’ll talk about value.

Contrarian– I buy companies that people really don’t like – companies that people hate; companies where the expectations are low but they are good companies. They are financially sound companies. They earn good returns on capital. They’re in good businesses but usually there’s an issue. It’s probably a temporary issue.

One of my jobs is to figure out if the issue is temporary or if the issue’s permanent (they’re usually temporary) and figure out what the issue is.

Sometimes actually it’s not even real. Sometimes it’s perception. Sometimes it’s real. Sometimes it’s about a product. Sometimes it’s about a market. Sometimes it’s about a cycle.

But there’s an issue and the expectations that Wall Street and the investor world have for these companies are usually very, very low and I’m trying to find prices and that’s the value part of this – prices that are low, along with those expectations.

So I am trying to buy well-financed, good companies when they are on sale, with a willingness to take on the issue, to have the patience for the issue to be solved, with the understanding that the price I am paying is low enough to compensate me for the risk of that operating issue.

If I do it right, I have two possible ways to win. If the performance of the company is better than that low expectation, the stock will likely go up; that’s kind of how the market works and that’s really good.

Then, if there’s a continuous performance in that same direction, the multiple or the valuation probably goes up as well, so then I have won twice. I have won because performance is better and I’ve won because the valuation is better. That is the idea. If I get it wrong, hopefully I have paid a low enough price where I don’t get hurt too badly and that, to me, is contrarian value.

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