Value Investing

Olstein Capital: Investing In Undervalued Small To Midsize Stocks

The Wall Street Jornal’s interview with Olstein Capital Management’s Eric Heyman and Tim Kang.

H/T Dataroma

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Olstein Capital

SECTOR = GENERAL INVESTING

TWST: Could you identify yourselves please?

Mr. Heyman: This is Eric Heyman. I am the Portfolio Manager of the Olstein Strategic Opportunities Fund.

Mr. Kang: And this is Tim Kang. I’m a Senior Analyst at the Olstein Funds.

TWST: Would you like to talk a little bit about the firm?

Mr. Heyman: Sure. So we are value investors who look for solid businesses that have been unfairly punished by short-term factors, whether it’s an earnings miss, poor management decisions, regulatory changes or overall negative market sentiment. We consistently find that many small-to-midsized companies face strategic challenges, often as a result of unrealistic expectations for growth, or they fall below investors’ radars because they are under-followed by Wall Street.

The Olstein Strategic Opportunities Fund was launched in November 2006 to invest in the undervalued stocks of small-to-midsize companies, or SMID companies, companies that face unique strategic challenges and choices. We believe that the market’s short-term reaction to SMID companies that stumble creates unique investment opportunities for us as long-term value investors. Equity markets tend to overreact and sharply penalize small-to-midsized companies that encounter problems in the face of unrelenting expectations for constant growth. Over its 11-year history, the fund has continued to emphasize investments in turnaround situations and SMID companies facing unique strategic challenges.

TWST: And are there a few things that make your approach to SMID unique, and did you want to talk a little bit about the philosophy of the investments?

Mr. Heyman: Sure, so there are two factors that differentiate the Olstein Strategic Opportunities Fund from its peers. Number one, our focus on turnarounds and companies facing strategic challenges, and number two, our emphasis on the quality of earnings and an intensive analysis of company financial statements and public documents. When most investors think of investing in small-to-midsized companies, they tend to think of fast-growing companies or finding the next high flyer. While it’s great to find that one success story, the reality is that most companies misstep as they grow. We focus on a different type of company, those small-to-midsized companies with strong products or services that have stumbled or hit a wall usually due to Wall Street’s demands for constant growth. Our approach to finding value in companies with temporary issues or companies that need an operational turnaround makes us very different from our peers in the SMID space.

The second factor that differentiates our process is our emphasis on the quality of earnings. One of the fundamental tenets of Olstein’s investment philosophy is that in today’s world of information overload, a forensic analysis of a company’s financial statements, regulatory filings and accompanying footnotes is the best way to determine the quality of its earnings, the success of its strategy and the sustainability of its performance and the impact of management’s decisions on future free cash flow. We believe that a forensic analysis of a company’s balance sheet, income statements and other regulatory filings is more useful when assessing a company’s ability to produce future free cash flow than management forecasts, earnings guidance or personal visits. We also believe that our analysis and valuation approach, which focuses on a company’s ability to generate free cash flow, allows us to identify a great many investment opportunities overlooked by the market.

TWST: And did you want to highlight a company that you find interesting?

Mr. Heyman: The first one I want to talk about is Spartan Motors (NASDAQ:SPAR). It’s a producer of heavyduty and custom vehicles. The company has three major business lines: fleet vehicles, emergency response vehicles and specialty vehicles which include motor home chassis, defense vehicles and small aftermarket parts offerings. After the company languished for several years, the board brought in Daryl Adams, an auto executive who became CEO in February of 2015, to reinvigorate the business. He diagnosed the company’s problems including unprofitable segments in the RV chassis and emergency vehicle segments, installed new leadership and chain of accountability, and has put in place a turnaround plan that is starting to show results.

See the full transcript below.