Small-Cap Investing Methodology: an Interview with Scott M. Rich, Principal, President and Chief Investment Officer of MindShare Capital Management

Wall Street Transcript

67 WALL STREET, New York - November 8, 2012 - The Wall Street Transcript has just published its Investing Strategies Report offering a timely review for investors and industry executives. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Small Cap Investing - ESG Investing - SRI Investing - Long Term Investing - Focus on Fundamentals

Companies include: Beazer Homes USA Inc. (BZH), Ryland Group Inc. (RYL), Builders FirstSource, Inc. (BLDR), Mueller Water Products, Inc. (MWA), 8x8 Inc. (EGHT), Allot Communications Ltd. (ALLT), PDF Solutions Inc. (PDFS) and many others.

In the following excerpt from the Investing Strategies Report, an experienced money manager discusses his firm's investment methodology and top picks:

TWST: Please start with a brief history of Mindshare Capital Management and an overview of the firm today.

Mr. Rich: MindShare was founded in January of 2000. We are a registered investment adviser solely focused on small-cap growth investing. The firm is 100% employee owned, and the portfolio managers average over 19 years' experience in small-cap investing.

As I mentioned, we are focused solely on exploiting opportunities in small-cap stocks, and we do that through the implementation of our "Fast Follower" strategy, which I think is unique in the small-cap world. And what's unique about it is that it identifies improvements in the investor sentiment, which leads us to companies whose growth prospects are at an inflection point ahead of most other growth investors. And it does so while reducing the risk of being in stagnant investments. So that's our firm and an overview of the team, our experience, as well as what I would say is our investment edge or what makes us unique.

TWST: Is there anything you would add in describing the firm's overall investment philosophy?

Mr. Rich: Our philosophy is based upon the fundamental premise that earnings growth ultimately drives investor returns. Underlying that overall premise, if you will, is that the company should be displaying what we consider an improvement in the investor sentiment, along with quality earnings and sustainable growth. And importantly, we allow our winners to run. In other words, we maximize our returns by allowing our winners to run, and we manage risk by trimming underperformers quickly. Both strategies follow the same philosophy and implement the same process. I think that's very important, as everybody on our team is really doing the same thing - day in, day out; week in, week out - as far as implementing our philosophy and our process.

Our process starts with, as with most firms, idea generation. But rather than screening on - and again, this is what makes us unique - what we consider to be rearview mirror fundamental data, which with small-cap companies will cause you to miss very important inflection points of growth, our objective is to detect early signs of improving investor sentiment. What this tells us is that other investors, whether they are long-term shareholders or insiders, or even suppliers to the company, have detected or they believe that something positive is occurring at this company.

And again, with small-cap stocks, there may be one minor development that can cause a significant change to the company. In other words, one new product, one new service, one change in their merchandising or marketing plan - whatever that may be, it can have a significant impact on a small company. So if you're screening on rearview financial data - such as sales, earnings, cash flow - this positive development is probably not reflected yet in those numbers. But the market will start to discount that, because for a small company, one change will have a very positive impact on those fundamentals in the next quarter or two. So what we do is we screen on what we call an improvement in investor sentiment. The way we do that is we look at the stock price and volume trends, and we look at that for companies that have reported upside earnings surprises and/or positive estimate revisions.

Even more importantly, we are looking deeper into the news of the company. Has there been a recent new product introduction? Are the design wins increasing? Are subscribers increasing? Is there an acceleration in same-store sales? Has there been new analyst coverage? Have there been ratings upgrades? This will allow us to detect these improvements in investor sentiment, and that's how stocks became ideas for our strategy.

Once we have identified these ideas, we then layer in our fundamental analysis...

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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