U.S. Markets close in 52 mins

Medidata Solutions (MDSO) is a Good Example of "Better Company" in Small- and Mid-Cap Investing: a Wall Street Transcript Interview with George Goldner of 300 North Capital

67 WALL STREET, New York - October 31, 2012 - The Wall Street Transcript has just published its Investing Strategies Report offering a timely review of the market to serious investors and industry executives. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Socially Responsible Investing - Value Investing - Small-Cap Investing - Evidence-Based Investing - Risk Management - Downside Protection

Companies include: Discovery Communications, Inc. (DISCA), Medidata Solutions (MDSO), and many others.

In the following excerpt from the Investing Strategies Report, an experienced portfolio manager discusses his investment management philosophy:

TWST: You mentioned 300 North Capital is a bottom-up shop. Would you tell us a little more about the firm's philosophy?

Mr. Landreth: The basic investment philosophy of the firm - and this is across not only all of our long-only strategies, but also our two alternative strategies - includes three basic tenets. First we buy better companies. What I mean by better companies, and we're a growth shop, so companies are ones that have faster growth or better-than-average growth, higher quality in regards to return on assets, return on equity. In other words, category leaders within their respective industries and those that have and stronger management teams. So first we look to invest in simply the better companies out there.

Second, we look to invest in those better companies when we feel their stocks are mispriced. We want to have a different view than Wall Street, an out-of-consensus opinion on how investors are valuing the company. We know that the best companies in the world aren't always great investments. So it is imperative to be patient and disciplined when we invest in those companies. So, to review, we first want to buy better companies, and second, we want to find those better companies when they're mispriced.

And then last, and this is really fundamental and core to our beliefs, we believe in a very rigorous risk management process and philosophy. We feel risk management tends to be very underappreciated in this business. Specifically, when it comes to our names, we fundamentally believe that the five biggest detractors in any given year are going to have a greater impact on performance than the five biggest contributors. Because of this fact, we have multiple processes in place to weed out and find those potential underperformers or blowups before they impact the performance of the portfolio.

TWST: Please talk more about risk management. What are the kinds of activities the firm utilizes to mitigate risk?

Mr. Landreth: First, we make it difficult to get a name in the portfolio. So our buy process can be very detailed and somewhat onerous. But that's the point. Anyone who wants to add a name in the portfolio has to do a full presentation of the candidate to the entire research group. We have a team of very experienced professionals with an average tenure in the business of over 15 years. There are seven people on the research team. Having to present a name to an experienced group tends to raise the bar very high relative to say just walking into an office and giving a portfolio manager the 10-minute elevator pitch which is what I did early in my career, so getting a name in the portfolio is a lot more difficult, and we believe that because it's more rigorous, we're going to have fewer future blowups actually make it in the portfolio. So that's first.

Second is, with the names in the portfolio, we conduct what we call our maintenance process. This is a proactive review and analysis of the potential risk of a surprise change in a company's fundamentals just before earnings season begins. Earnings are typically the most impactful binary event a company will have every quarter, and we want to be on top of and ahead of the fundamentals and expectations going into those earnings reports. Everybody spends a couple of weeks prior to a company reporting their earnings making those last channel checks, talking to the sell side or talking to companies or competitors, whatever it takes to get the broadest amount of information. Thus, it is basically a mosaic view of what to expect.

We then rank each name by potential risk. We want to be as proactive as possible because once a company reports, we will be reacting to whatever management says and what they reported. This is really our way of being fundamentally proactive because if you think about it, in this business, once a name is in a portfolio, everything is really reactive. A company reports their quarter, the stock moves up or down. There is and upgrade or downgrade or earnings revision, the stock moves up or down.

As fundamental investors, we want to be ahead of that information. This is our proactive versus reactive way of being ahead of that information. When we go through this process, everybody presents their names, and we'll rank them in terms of risk and we review this as a group, and two things come out of it. Number one is we can take direct action. We can either cut back a name or sell a name, and that happens sometimes. But also, and this is really not measurable or quantifiable, it really stresses to everyone the culture of avoiding those torpedoes. If you think back to that third tenet of our philosophy, which is avoiding the blowups, we have these processes in place that drive home the culture that this is what we want to avoid. Using a baseball analogy, we want lots of singles and doubles. We are not going to swing for the fences because we know that comes with a lot of strikeouts. And so risk management is the core to our philosophy and is part of the fabric and culture of the firm.

TWST: Please elaborate on what makes an organization a "better company."

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.