Higher Long-Term Returns Through Small-Cap Investing - Gregory A. Roeder - Adirondack Research And Management, Inc.

Wall Street Transcript

67 WALL STREET, New York - October 6, 2011 - The Wall Street Transcript has just published its Small-Cap Value and Investing Strategies Report offering timely information to serious investors and industry executives. This report contains expert industry commentary through in-depth interviews with Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online. Topics covered: "Markets Work" Mentality - Undervalued Assets - Market Volatility as an Opportunity for Growth - Non-Exchange-Traded Physical Commodities Companies include: CSS Industries (CSS); Cameco (CCJ); Citigroup ©; Coca-Cola (KO) and many more In the following brief excerpt from the Small-Cap Value and Investing Strategies Report , interviewees discuss their portfolio focus, investment style and current top picks. Gregory A. Roeder, CFA, founded Adirondack Research & Management, Inc., in 2004 and currently serves as Head of its research department and as Co-Portfolio Manager of the Adirondack Small Cap Fund. Before founding Adirondack Research & Management, Mr. Roeder served 18 years in various capacities in the financial services industry. His experience includes Analyst/Portfolio Manager for Eddy & Wakefield, Equity Research Analyst for CL King & Associates and assorted roles in KeyCorp's credit/risk management groups. He graduated from the State University of New York at Plattsburgh with a bachelor's degree in economics and from Hofstra University with a master's degree in finance. TWST: Would you give us a few examples of your top holdings that you believe are representative of your approach and philosophy? Mr. Roeder: One of our top holdings is Knight Capital Group, Inc. (KCG), which provides trade execution services for investors of various asset classes. They are the leading market maker in the U.S., ahead of UBS (UBS), Merrill Lynch (BAC) and Citigroup ©. In the past several years, equity trading volumes have diminished. Trading volumes are cyclical, and judging by KCG's current valuation, most investors are betting that low trading volumes are here to stay. We believe otherwise. Not only do we believe that trading volumes will improve, we think that KCG will significantly benefit from the cost-reduction measures implemented during the recent downturn. For example, they have recently taken the task of trade clearing in-house, which should have a positive impact on earnings and cash flow. They've also gotten into a couple of lines of business that they weren't in before, like fixed income. This line of business is currently not quite at optimal profit levels, but should benefit from the trend toward automation and transparency in the fixed income markets. Knight Capital has a very strong balance sheet and they generate a healthy amount of free cash flow, and they should perform better as the markets get more volatile like they have over the past several months. So we constantly ask ourselves, Why the bargain? Aside from the general impatience of many investors, we think KCG suffers somewhat from the fact that it does not have any direct peers. They don't get followed very well by the Street. The companies they compete with are small parts of very large investment banks. Interestingly, these banks are struggling with other issues, and it would not surprise us if we see further consolidation within the U.S. equity market making business. So when we look at the opportunity of buying shares in a company like KCG that trade for $12 to $13 - and probably could generate north of $1.50 of free cash flow per share this year and possibly generate north of $1.75 in cash next year - we are thrilled. Another misunderstood company that we like is Coca-Cola Bottling Co. Consolidated (COKE). Its ticker is COKE and they're based in North Carolina. They're the largest-remaining independent bottling company for Coca-Cola (KO) serving about 20 million people in parts of the Southeast U.S., and they are one of the few independent Coke bottlers left in North America. Coca-Cola recently bought the largest bottler in North America, Coca-Cola Enterprises (CCE), and they've made their intentions known that they want to have control over their bottling network. So when we look at Coca-Cola Bottling Consolidated, we see a company that operates a recession-resistant business and currently generates free cash flow of more than 10% of COKE's market capitalization. When looking at the alternative of investing in a 10-year Treasury yielding less than 2%, it seems like a no brainer - well, maybe not exactly. This company is one of those that are not well covered. I believe there is just one analyst who follows this company, mainly because of the company's small public float of less than 5 million shares.So we have a company that generates excellent cash flow despite the current headwinds, and we have the backstop of their largest shareholder potentially buying them. If one were to assume that a sale of COKE would fetch a multiple similar to other bottler deals then we could see price appreciation of 30% or so from current levels. The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with Money Managers. This Small-Cap Value and Investing Strategies Report is available by calling (212) 952-7433 or via The Wall Street Transcript Online . The Wall Street Transcript does not endorse the views of any interviewees nor does it make stock recommendations. For Information on subscribing to The Wall Street Transcript, please call 800/246-7673


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