Rutabaga Capital Management: Dominant niche & temporary problems = profits

Better Than Small
Sizing Up Small Caps
By Rhonda Brammer
Barron’s – August 13, 2001

When, after two decades at D.L. Babson, where he had managed the highly regarded microcap Enterprise Fund, Peter Schliemann in 1999 decided to strike out on his own, he obviously needed a name for his fledgling firm. Finally, after no little mulling, he came up with — are you ready? — Rutabaga Capital Management. That’s right — as in the humble yellow-rooted vegetable, eaten by people and livestock alike, sometimes called a Swedish or Russian turnip.

“Well, it’s catchier than Schliemann & Associates,” quips the 56-year-old money manager.

Schliemann, whose Enterprise Fund was ranked No. 1 by Lipper in the microcap category for the 10-year stretch just before he left, says he got the idea for the name from a woman at Morningstar who had described his investment strategy at Babson as “unearthing rutabagas.” All along, Schliemann has shown an affinity for unloved, largely unfollowed companies, typically in rather run-of-the-mill businesses and not infrequently going through a rough patch.

“If you asked 10 analysts what they look for in an investment,” he observes, “at least eight of them will say a company with good profit margins. Well, we look for just the opposite.”

A big believer in the regression to the mean, Schliemann searches out small companies whose margins have temporarily deteriorated for reasons he thinks he has a handle on. And while he wants to see a catalyst for improvement, he’s willing to wait two or three years for the full turnaround. He prefers companies with a dominant niche and a good balance sheet — though he will buy leveraged outfits if they have ample cash flow to service and pay down debt.

Schliemann runs $285 million for institutions — $60 million in microcaps (companies with market caps of less than $200 million) and the balance in small-caps (with market caps of less than $1.5 billion). And while the small-cap portfolio has handily outperformed the Russell 2000 — up an annualized 8.9% since June 1999 versus 4.1% for the Russell — it’s the microcap fund that has truly sparkled. Since September 1999, it’s up 26.1% annually, compared with 8.4% for the Russell. So far this year, through July 31, Schliemann’s microcap picks have gained a sizzling 40.4%.

But don’t think for moment Schliemann is a wild and crazy guy. Because of his value bent, the beta of his funds — one measure of volatility — is roughly half that of the overall market, with the microcap portfolio being even less volatile than his small-cap holdings.

Continue reading (includes sketches of three microcaps)

Rutabaga Capital Management holdings as of 9/30/2010



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