Some people look at small caps as high-risk, low-visibility stocks that can be difficult to buy and sell as needed. Teresa Lee sees opportunity.
The co-chief investment officer at Toronto-based Sionna Investment Managers specializes in managing smaller-sized company investments for a broad range of clients.
Ms. Lee spoke to The Globe and Mail recently about a few of her favourite names, including one iconic Canadian name her firm reluctantly sold recently after it was taken over by a larger company.
Who do you invest for?
We manage investments for both retail and institutional clients. Several of our institutional clients are universities. We manage their endowments. We also have some hospitals, where we manage their employee pension fund. We also have retail products that we offer through mutual funds and separately managed accounts.
How would you characterize the small-cap market today?
The small-cap market today is still relatively attractive. Historically, over the past 20 years or so, these stocks have traded at a discount to large caps, or about 25 per cent on a price-to-book value basis. Today, that discount is closer to 35 per cent.
Why is the discount higher today?
The discount is usually larger when people are more risk averse. For instance, we saw an enormous discount after the credit crisis in 2009, of around 65 per cent. Small caps performed ridiculously well the year after.
Why should investors consider small caps in their portfolio?
Historically, small caps have outperformed large caps over the long term, but with more risk. Small caps are generally perceived to be riskier than large caps, just because they are less followed and less liquid. That can be both a positive and a negative. The positive is there can be more opportunity … and you can find stocks that are mispriced.
What stocks have you been buying lately?
One stock that we have owned for a long time, and have increased position in, is Winpak Ltd. [which is up 15 per cent over the past 12 months], a producer of packaging for food and health. It has generated significant return on capital over the long term. We recently added to our position on some weakness in the stock.
What have you sold?
The most recent name we sold was Whistler Blackcomb Holdings after it was bought by Vail Resorts. We have a Canadian small-cap mandate, so Vail didn't qualify. What we liked about Whistler Blackcomb is that it has a world-class asset. We owned it for about two or three years.
What other small caps do you like?
One company we really like is Pulse Seismic Inc., which owns a library of seismic data. Oil companies need the data to determine where to drill, and it's not a high-cost item for them. It's a business that has been hurt by the recent downturn in energy prices, but Pulse Seismic is a company that, when you look at its assets, has a big library that has been around for decades. It also has low operating costs so it can weather the downturn. It has no debt and it continues to generate free cash flow, even in this type of environment. When there is a return to normal, we think Pulse Seismic will do really well.
What stock do you wish you bought?
Constellation Software. It has performed fantastically, which is an understatement. It has all of the attributes we generally look for in a business. It looked expensive when we looked at it about five years ago. [The stock is up about 700 per cent since then and is now valued at about $12.4-billion]. I guess you could say we missed it.
This interview has been edited and condensed.