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Small Cap Commentary – April 2017


Equity markets were positive for the month of April as earnings season is churning out better quarterly earnings growth than has been witnessed in several years. As I write this, our benchmark, the Russell 2000® Index has posted +9.7% earnings growth on a year-over-year basis and the S&P 500® Index earnings growth is +13.5% for the same period.  These are the best earnings growth numbers we have seen since the fourth quarter of 2011.

In addition to earnings season, April is also the month that baseball fans everywhere rejoice. Our very own St. Louis Cardinals are following the path of earnings with a stronger than expected showing primarily as a result of better pitching out of the bullpen.  The history of the term bullpen in baseball remains up for debate as no uniform theory has ever garnered enough support to stand as the original.  Regardless, it is well known as the area of the field where relief pitchers congregate during a game.

At Argent, our Small Cap team is organized in a similar fashion. We refer to our physical setup as the bullpen, and the similarities do not stop there.  Among our team, open communication is encouraged and expected.  Each team member screens for names that could merit a full run through of our investment process and we often turn to one another for input just as a relief pitcher might turn to a teammate for insight on opposing batters.

Our process requires a formal report and presentation before a name is voted into the portfolio. These reports most always include some aspect of knowledge derived from our internal discussions. The information can vary from knowledge on the product, service or management team to data on the industry group or something a competitor had mentioned.  We seek any variable which contributes to making better, more informed decisions.  In fact, some of our best outcomes have arisen when our own individual work is confirmed by others on our team.

II-VI Incorporated (IIVI) is a recent addition to the portfolio and a prime example of why this structure works well for our small cap team.  IIVI (pronounced two–six) designs, manufactures and markets optical devices for use across various industries.  Recently, the optical component industry group had come under pressure due to order pattern weakness in China.  However, among our bullpen team, we each found supporting evidence that overall demand for photonics products and industrial lasers, which are manufactured by IIVI, were incredibly robust.  Additionally, IIVI had exposure to new opportunities within the rapidly expanding 3D sensing technology, and this gave credence to our investment thesis that IIVI was a strong buy.  We believe IIVI has positive catalysts for earnings acceleration and it was our team approach to these factors which helped us realize the upside of the stock greatly outweighed the downside risk.

Just as it is useful for a pitcher to be informed by his fellow relievers if the hitter he stands to face will swing for anything low, it is important that we take any applicable information known by others in our bullpen surrounding a company into consideration. As they say, knowledge is power.   We appreciate your interest in Argent Capital Management and hope you will refer others.  We have three very successful equity strategies – Large Cap U.S., Small Cap U.S. and Dividend Select. If you have questions on any of these please call us.

 

Ward Brown

Small Cap Trader & Research Analyst

Past performance is no guarantee of future results. Russell Investment Group is the source and owner of the Russell Index data contained or reflected in this material and all trademarks and copyrights related thereto. The presentation may contain confidential information and unauthorized use, disclosure, copying, dissemination or redistribution is strictly prohibited.  This is a presentation of Argent Capital. Russell Investment Group is not responsible for the formatting or configuration of this material or for any inaccuracy in Argent’s presentation thereof.    The information provided in this report should not be considered a recommendation to purchase or sell any particular security. You should not assume that investments in any securities were or will be profitable. A list of stocks recommended by Argent in the previous year is available upon request.