Screen This: Stratton Small Cap Value
Computer screens can be a fund's best friend when it comes to picking stocks. Strict quantitative funds, for example, take decision-making entirely out of human hands and leave it up to computers to pick stocks. Other funds take a hybrid approach. Among them, Stratton Management, of Plymouth Meeting, Pa., is a prime practitioner. The firm uses computers to pick stocks but then leaves it to humans to make the final decisions about which to keep and which to exclude.
Stratton runs three retail funds, the best-performing of which has been Stratton Small-Cap Value. Over the past five years through October 23, the fund (symbol STSCX; 800-472-4266) returned 19% annualized, placing it in the top 6% of small-company value funds, according to Morningstar.
Small-Cap Value's screens, which focus on valuation, cash flow, and earnings revisions, spew out a list of 25 to 30 promising names in each sector. From there, manager Gerald Van Horn, aided by one assistant, identifies the cheapest stocks in each sector. Van Horn, who has run the fund since 2000, also searches for catalysts that could drive growth over the next one to three years. A catalyst could be development of a new product, a shakeup in management, a technological advancement, or "anything that can increase investor sentiment toward the stock," says Van Horn.
The fund benefited last year from heavy exposure to energy and industrial materials, each of which accounted for about 20% of the portfolio for much of the year. Van Horn has trimmed the fund's energy exposure, but still remains bullish on the sector, with a 17% weighting. One of his favorite energy stocks is Tetra Technologies (TTI), a company that makes chemical products used by oil and gas companies. "The catalyst here is the hurricane season last year," says Van Horn. "This is basically a company that comes in and cleans up damaged rigs and platforms afterward."
Industrial materials currently make up 18% of the fund's $650 million asset base. One holding is Armor Holdings (AH), which makes vehicle-armoring systems and security products for military and law enforcement. Other holdings include Anixter International (AXE), a distributor of cables used in network communication; Alaska Air Group (ALK), the operator of Alaska Airlines; and West Pharmaceutical Services (WST), which that makes packaging used in the health care industry.
The fund's annual turnover is low at 15% (the average for funds that invest in small, bargain-priced stocks is around 90%.). Small-Cap Value charges 1.28% annually for expenses, which is also below average for the category. It requires a minimum investment of $2,000.