Deep-Value Approach to Dividend Income and Microcap Investing Leads Portfolio Managers to Long Term Holds in U.S. Based Stocks

Wall Street Transcript

67 WALL STREET, New York - August 9, 2012 - The Wall Street Transcript has just published its Investing Strategies Report. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Microcap Strategy - Investing in Canada - Deep Value - Downside Protection

Companies include: Sturm, Ruger & Co. Inc. (RGR), Granite Construction Inc. (GVA), Badger Meter Inc. (BMI), Gorman-Rupp Co. (GRC), J&J Snack Foods Corp. (JJSF), Span-America Medical Systems I (SPAN) and many others.

In the following excerpt from the Investing Strategies Report, expert portfolio managers discuss their outlook for investors:

Mr. Rafn: One thing about our small microcap strategy is that it is bottom-up stockpicking. We would tend to look at economic or political issues as more headwinds or tailwinds. We use something we call the value franchise 15. It is 15 repetitive characteristics including founder/owner/operator management, high internal rates of return, fortress balance sheets, lots of cash, low debt and limited goodwill.

We like paternalistic organizations. We like organizations with a lot of hidden, or what we call reserve assets, such as overfunded pension plans, surplus values to real estate, that kind of thing. We are trying to find those companies that have at least 11 of these 15 characteristics.

We also have a bit of a contrary bias in the strategy. So for instance, we have a position in Sturm, Ruger (RGR). You've got the U.N. effort to bring international gun control to the U.S. Every time President Obama and those on the left talk about gun control, Sturm, Ruger goes up three points. Historically, in the United States, post World War II, gun sales volume has been about 3 million to 6 million units per year. Concerns about the Obama administration's antipathy toward gun owners' rights have taken that yearly demand from 3 million to 6 million units to 11 million units last year. We are on our way this year to probably somewhere between 12 million to 13 million guns. We have not seen this type of demand in any nonwar environment in the history of our country. The whole self-defense Second Amendment is a big theme for us.

Infrastructure is another important theme in our portfolio. About 26% of our positions are in water, sewage, highway transit, railroad infrastructure and the power grid. We own Granite Construction (GVA), which we have held since 1994, in the highway transit area. We own Badger Meter (BMI) and Gorman-Rupp (GRC) on the water side. So for us, infrastructure is a pretty big position.

One of the unique things about small micro-cap is that these companies are really the ones that drive the economy, that drive technology, that drive that sense of creativity. So for us, we are less concerned about the talk of a weakening economy than about the exciting things that are happening at our companies.

The folks at Gorman-Rupp, Mansfield, Ohio, just built a new 789,000-square-foot plant a couple of years ago. They ended up paying for it in a little over four years - and that's probably a 50-year asset.

We've got J&J Snack Foods (JJSF), with Gerry Schreiber. Gerry Schreiber is probably the finest CEO in packaged food today. Most people wouldn't recognize J&J Snack Foods. What they would recognize, if they have kids, would be the SuperPretzels, Luigi's Frozen Ice or the Icee that kids make you buy for them at the theatre.

Despite the uncertain economic environment, I see absolutely no fear in our companies, whether it be Granite Construction, one of the finest roadbuilders in the country or Span-America Medical Systems (SPAN), which is a leader in the electronic mattress business for acute care and subacute hospitals. They are the companies that are expanding, getting larger and encouraging creativity within their founder/owner/operator management cultures.

For more from this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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