Microcap Value Investors: an Interview with Peter Gottlieb, Chairman and Chief Executive Officer of North Star Financial Services and Eric Kuby, Chief Investment Officer of North Star Investment Management

Wall Street Transcript

67 WALL STREET, New York - June 10, 2013 - The Wall Street Transcript has just published its Deep Value Investing Report offering a timely review to serious investors. This special feature contains expert industry commentary through in-depth interviews with highly experienced Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Bottom-Up Stock Selection - Cyclical Sectors - Exposure to Emerging Markets - Large-Cap, Deep-Value - Value Oriented Strategy - High-Quality Companies - Value Investing - Deep Value

Companies include: Mattel (MAT); Hasbro (HAS); LeapFrog Enterprises (LF); Apple Inc. (AAPL); Acme United (ACU); Wal-Mart Stores (WMT); The Home Depot (HD); Alteva (ALTV); Verizon Communications (VZ); Dover Saddlery (DOVR); Kimberly-Clark (KMB) and Campbell Soup Company (CPB) and many others.

In the following excerpt from the Deep Value Investing Report, expert portfolio managers discuss their methodology and current top picks:

TWST: Please start with a little bit of a history and overview of the firm to introduce our readers to North Star.

Mr. Gottlieb: Eric and I have been working together since 1989, and over time we've developed a number of strategies, and really that all came together in 2003 when we started North Star Investment Management Corporation. North Star is a Chicago-based money management firm with about $650 million in client assets.

Some of those assets are separately managed accounts for individuals, and as of the beginning of June, we're going to have three mutual funds, which are going to have approximately $125 million of assets invested in essentially three strategies. One is a microcap strategy, one is a dividend strategy that focuses on smaller stocks, and a third strategy we call our micro to macro strategy, which allows us to invest in small, microcap companies to the largest global corporations.

TWST: How would you describe North Star's overall investment approach and philosophy?

Mr. Kuby: We're value investors, so a cornerstone to what we do is we look at companies as if we were buying the entire company. As such, we like them to be businesses that we can understand, so you see a lot of consumer products companies, a lot of industrial companies, things that are not that complicated of businesses. And we are looking for companies that are generating high levels of free cash flow versus their valuation. If you own the entire company, you like to see that you are getting a nice cash return on your investment, and that's the way we fundamentally look at it.

We've found that the area that we can perform the best is in the microcap space. So it's a microcap value bent that really differentiates us, and that is because it's an area of the market where there are enormous inefficiencies and where our hard work pays off, because we can identify opportunities that are significantly underpriced.

TWST: We are going to focus on deep-value investing, so generally speaking, how ample are opportunities in today's market?

Mr. Gottlieb: What I think most investors fail to realize is that roughly half of the companies that are publicly traded have market values of under $500 million, which is what we define as a microcap company, so there are a lot of names to look at. In the case of dividend-paying smaller stocks, there are roughly about 2,000 companies that pay dividends. And roughly half of those companies are companies under $1 billion, which is what we look at in our small-stock dividend strategy. So there are a lot of names to look at, and once we start with that universe, then we start looking for companies that meet our value criteria...

TWST: What criteria do you focus on when evaluating specific securities?

Mr. Kuby: Our go-to screen when we're looking for ideas is an enterprise value to EBITDA screen. That generally gives you the quickest look at companies that are being valued cheaply to the cash flow that they are generating. So that's generally our starting point. We then look at the balance sheets; we generally like underleveraged balance sheets...

For more of 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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