Value Investing in Small and Small-to-Mid-Cap Stocks

EMS:

Hi, Phil. Thank you so much for being with me today.

Phillip Cook:

Thanks for having me. It's good to be here, Elana.

EMS:

Absolutely. So, to kick off the conversation, tell us a little about the firm and how you got to where you are today.

PC:

Yeah. So, my father actually started our firm in the late 1980s, and we have obviously had some sort of secret sauce to be still investing in small caps 35 years later. I worked in private equity for a few years before I joined him and really learned a lot about what you'll find out later a little bit. But our approach is very much sort of private equity-like in that we're longer-term owners of businesses. So, that was a very good breeding ground for me to learn. And then I came and joined him 18 years ago and started to transition leadership of the firm from him to me over the last 10 years so both the firm leadership and the investment team, the portfolio management, all of that has been transitioned over the last decade or so.

EMS:

Phil, given the firm's focus on small cap value investing, I would love to hear your overall high-level outlook for the space.

PC:

Yeah. It's a very interesting time to be a small cap investor. Obviously, it's well documented that small caps have not been the favored son of the investment world for much of the last decade, but with that, it's actually brought a great opportunity for investors who specialize in the space. So, we've actually seen successes and see a lot of opportunities. There's a lot of places to get in trouble in the small cap space today. There's a lot of businesses and sectors that the market just really doesn't want to touch, but there's plenty of opportunities. We run a concentrated portfolio. So, for running a concentrated book, there's plenty of opportunities out there in the small cap world, and valuations are very much appealing relative to larger cap businesses out there.

EMS:

Phil, more specifically, I'd love for you to touch on some of the greatest opportunities you see in your space and why.

PC:

I mean, one of the greatest opportunities in our space really flows down from what's been driving mega caps and large caps, and that is this huge moment of bursting technology that is flowing out into the rest of the world, and it's impacting everything we do. So, while much of the headline attention is on the companies developing the actual technology, the knock-on impacts not only affect businesses all over the place, but they affect businesses for years and years and decades. And one of the most interesting areas that we find right now is maybe an area that most folks aren't looking at.

And industrial businesses, it's a big bucket of companies, and it doesn't sound very technologically savvy, but the knock-on effects of AI, of a lot of technology that's being developed flows down into businesses that make things that we use every day. We have been overweight, well overweight industrials for 35 years. So, it is an area of expertise for us and also an interesting area at this moment in time as we see businesses and agriculture and construction and building products that you think of sort of being traditional old school businesses being transformed by AI and new technologies.

And right now, we find that those types of businesses aren't on everybody's radar, so that to us is a huge opportunity.

EMS:

Phil, on the other hand, what are some of the greatest challenges you face in your space and why?

PC:

I don't know if this is a challenge to our space or just a challenge to life in general, but I would say the greatest challenge is finding a place to be still, just finding quiet. I think good thought, good decision making, creativity comes out of a place of silence, not out of a place of noise. And it has become increasingly difficult to drown out the noise. So, the ability to think independently, the ability to think in large chunks of time rather than in short burst, I think is an art that's being lost. And again, I think that's a challenge for all of us in all of life.

It goes way beyond small cap investing, but it's very applicable to the space that we're in. As a small cap investor, it's very easy to be looking at headlines and watching what Nvidia might be doing today because it's fascinating what's going on in our world. So, to be quiet, to be focused, to find that space to really think deeply is a significant challenge. And then when you magnify that to a team and running a team and managing a team and having processes to allocate client capital, it just magnifies to a greater extent.

So, really running a firm, and it starts with me being able to find that space, but then building a culture where we foster creativity and independent thinking and trying to create that space for our colleagues is a huge challenge in today's world.

EMS:

Phil, we've covered a lot of ground today and wanted to see if there are any final thoughts you'd like to share with us.

PC:

I think for me, it's been a long journey of seeing significant ups and downs in the market. And then you get to this last four-year period since COVID where it feels like we've had multiple markets all crammed into a short period of time after a long run of sort of steady upward moving stock prices. And that volatility has created opportunities. We actually were able to, after being owned by external investors for 31 years, four years ago when COVID happened, we were able to buy ourselves back and become 100% employee owned.

And so, this new SouthernSun that we have built over the last few years has produced good results. And it's exciting just to think about the breeding ground or the soil that we're living in right now to find opportunities to take on these challenges, to use technology as a firm. How do we get better at what we do? How do our processes improve? How can we do more with less? There's a lot of exciting developments, and that leads us to a place where I think everybody gets pretty excited to wake up in the morning and do their jobs.

And the proof of that has been seen in our performance over time, but also as we think out into owning a business for 10 years or 15 years, I think there's tremendous opportunity in our small cap space and hopefully allocators over time will start to take some of the winnings off the table in the large cap land and in private investing and move to a place where there's a lot of liquidity in the listed small cap space. And so, we're glad to have our 35 years of experience in a niche that has attractive return potential.

EMS:

Phil, I wanted to thank you so much for sharing your perspective with our listeners.

PC:

Absolutely. Thanks for having me, Elana. I really appreciate it.

EMS:

And thank you for listening to the EisnerAmper podcast Series. Visit eisneramper.com for more information on this and a host of other topics. And join us for our next EisnerAmper podcast when we get down to business.

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