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TIP SHEET: Westwood Assesses Worst-Case Before Committing Money

(This article was originally published Monday.) --Fund focuses on stock's absolute bottom, then follows free cash flow --It's willing to sell into performing stocks --It has underperformed peers so far this year By Ian Sherr There's one thing that will always keep Ragen Stienke from buying a stock: If he can't figure out where its bottom is. As portfolio manager of Dallas-based Westwood SmMidCap Plus Fund (WHGPX), Mr. Stienke approaches every investment looking for where the downside--where a stock can go if things go bad--could be and whether it's something he can stomach. "If we can't come up with a downside or the downside is too great, we won't own a stock no matter what the upside may be," he said. The fund was launched in March last year, and counts about $17.8 million in assets. That rule cuts out a lot of consumer-focused companies that can effectively crater with a slow or bad product cycle. Companies like Research In Motion Ltd. (RIMM), whose stock sailed to nearly $150 before falling to $7. There are also cases like Apple Inc. (AAPL), which swung wildly during the recession from a high of nearly $200 at the end of 2007 to a low around $85 a year later, despite strong sales throughout. The stock has jumped another sixfold since, but he's not tempted. "It's truly saying when the wheels come off, where could the stock go to," he said. "It sounds crazy, but if the iPhone and iPad fell out of favor, why couldn't you lose 50% of your money?" So, Mr. Stienke looks at what a business's parts are worth. If it's a tanker, how much could he make back if the company sold for scrap steel? If it's a software company, what's the maintenance revenue worth? Not to mention cash on the balance sheet. Mr. Stienke also follows free cash flow, or operating cash flow minus capital spending, as an important datapoint. Finally, he figures out a rolling three-year price target for the stock, finds a weight for it in his model, and buys as much of the stock possible early on to reach the model-weight percentage in the fund. When a stock hits its three-year price target, he sells. If the company goes off the rails with a business-changing acquisition or new initiative to dramatically remake the company, he sells. The strategy has pushed his fund toward industrial companies, which make up about a fifth of the overall fund, according to Morningstar. Financial services makes up about 15%, and health care--something everyone needs at some point --comes in at nearly 9%. While Mr. Stienke tends to avoid consumer goods companies because of their cyclical nature, he likes The J.M. Smucker Co. (SJM). "Do you have children?" he asks when starting discussion of the stock. The company makes Uncrustables, a patented frozen peanut butter and jelly sandwich, sans crusts. "We bought it when they came out," he said. A more recent trade was East West Bancorp Inc. (EWBC), in which his fund sold nearly 18% of its shares as of its May report, despite the stock's nearly 19% growth so far this year. Mr. Stienke likes the company, and its government-backed purchases over the past couple of years, but it outgrew the fund's model weight, which pegs it at 2% of the overall holdings. "If a stock is working out, we will sell into that stock," he said, noting that as a stock grows closer to its three-year target, the risk of losses is greater. As a result, turnover, the number of shares traded as a percentage of the fund's overall holdings, is 31%. Many fund managers tend to bend the rules they set up for managing their funds. Dividend-only and low-priced "value" focused funds have bought Facebook Inc. (FB) shares, for example. But Mr. Stienke has stuck to his strategy, something Todd Rosenbluth, a mutual fund analyst at S&P Capital IQ said has hurt him in recent months, causing the fund, which was up 3.4% through Wednesday's close, to underperform its peers of "mid-cap value funds" so far this year, which are up 5.2%. A lot of that has been due to the volatile market, Mr. Rosenbluth notes, which has benefited large cap stocks rather than mid-caps. The S&P 500 index, for example, has jumped 10%. But, he said, there are a number of companies in the fund that his firm likes as well, so time will tell if they're both right in the end. Write to Ian Sherr at ian.sherr@dowjones.com

Stock News for Smuckers J M (SJM)
DateTimeHeadline
03/27/201506:06:05Small Company Offering and Sale of Securities Without Registration...
03/26/201521:29:05Building A Better (Balanced) Dividend Growth Portfolio
03/23/201517:14:35Prospectus Filed Pursuant to Rule 424(b)(7) (424b7)
03/23/201517:11:33Current Report Filing (8-k)
03/23/201516:30:00The J. M. Smucker Company Completes Acquisition of Big Heart...
03/19/201517:17:16Statement of Changes in Beneficial Ownership (4)
03/09/201508:01:51Current Report Filing (8-k)
03/09/201507:37:23Wheat prices in downward trend
03/03/201517:32:56Statement of Changes in Beneficial Ownership (4)
03/03/201517:11:56Statement of Changes in Beneficial Ownership (4)
03/03/201517:02:47Current Report Filing (8-k)
03/02/201517:42:10Current Report Filing (8-k)
02/26/201506:48:32Dunkin' Donuts K-cup partnership expanded
02/26/201506:00:00Dunkin' Brands, The J.M. Smucker Company And Keurig Expand Partnership...
02/25/201517:30:20Statement of Changes in Beneficial Ownership (4)
02/25/201515:53:25Buyout Shops Keep Skin in the Game
02/24/201517:28:56Current Report Filing (8-k)
02/23/201517:39:46Statement of Changes in Beneficial Ownership (4)
02/20/201517:09:22Statement of Changes in Beneficial Ownership (4)
02/19/201517:16:32Statement of Changes in Beneficial Ownership (4)

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