In a recent interview with Value Investor Insight, Mariko Gordon of Daruma Capital Management discussed what is involved in the job of a financial analyst, and also offers readers some insight into her research and investing strategies. Gordon founded Daruma back in 1995, and her flagship small-cap fund has produced a net annualized 12.7% return since inception, compared to just 8.8% for the Russell 2000.
Overview of Daruma’s portfolio
Despite her degree in comparative literature, Mariko Gordon is a value-oriented number-cruncher, and she does not limit herself to companies of a particular size or sector. Her primary investing philosophy is to identify firms that are undergoing a positive fundamental change. With that perspective as her yardstick, Gordon is finding opportunity today in an eclectic mix of sectors including managed care, temporary staffing services, satellite imagery, database marketing and women’s accessories.
Gates Capital Management's ECF Value Funds have a fantastic track record. The funds (full-name Excess Cash Flow Value Funds), which invest in an event-driven equity and credit strategy, have produced a 12.6% annualised return over the past 26 years. The funds added 7.7% overall in the second half of 2022, outperforming the 3.4% return for Read More
Mariko Gordon’s strategy: Finding companies that are changing for the better
Gordon looks for companies in one of three categories: turnaround stories, firms poised to profit from a sea change in the industry and companies that have developed a “better mousetrap.”
Turnaround stories are Daruma’s bread and butter. Gordon explains what she’s looking for: “The business has not been run well, but a restructuring and renovation is underway, often after a change in leadership. The key in these ideas is to sort out what’s self-inflicted and what’s structural – usually it’s a combination, not just one or the other.”
Finding companies that are in the right place at the right time is another way to make money, Gordon says. “Sometimes there’s something going on in the industry, such as consolidation that will lead to more price discipline, or business models that are becoming more sustainable or faster growing. In these types of ideas we can win not only from significantly improved business results, but from multiple expansion as well.”
Last but not least, Gordon says she is looking for companies with a breakthrough new technology. “The third key source for us of positive change is just the better mousetrap, a product or service that we believe can succeed well beyond what appears to be priced into the stock. These often wouldn’t be considered classic value investments, but unappreciated growth can be a very attractive potential source of value too.”