Japanese poetry and the trading floor do not often mix. They are even less likely to do so in Houston, Texas.
But Ryan Crane, chief investment officer of the Stephens Investment Management Group, encourages his analysts to keep the simplicity of haikus in mind when talking about stocks. ‘For us, it’s all about getting through all of the clutter and separating the signal from the noise to find out what it is that really matters,’ he said. ‘I tease the team that the ultimate stock pitch is in a haiku form.’
The parent company, financial services firm Stephens Inc., has been around since 1933, but the asset manager was founded in 2004 when Crane, John Thornton, Kelly Ranucci and Sam Chase left AIM Investments, now Invesco. Crane was a manager on the AIM Small Cap Growth fund and a series of other small and mid-cap growth offerings, as part of a team led by small-cap veteran Bob Kippes.
Stephens Investment Management manages $4.3 billion in assets and has 17 employees, seven of whom are investment professionals. ‘Everybody on the team passes the test that you would be happy to be stuck in an airport with them,’ Crane said. ‘It’s kind of like a family, we’re all really good friends and we all hang out together and take trips together.’
The firm offers three strategies: the Stephens Small Cap Growth strategy, the Stephens Mid Cap Growth strategy and the Stephens Small-Mid Cap Core strategy. Two of its strategies are available in mutual fund format: the $587.2 million American Beacon Stephens Small Cap Growth fund and the $94.5 million American Beacon Stephens Mid Cap Growth fund.
Over the past three years, the American Beacon Stephens Mid Cap Growth fund has returned 28.8%, compared with the average mid-cap growth fund, which returned 28.2% over the same period on a total return basis.
Across all of its strategies, the team starts with data from Factset and Bloomberg to generate its initial universe of roughly 3,000 companies. It then uses two screens for quantitative research.
A core growth screen singles out well-established companies with a competitive advantage. It runs four regression models – linear, seasonally adjusted linear, exponential and a seasonally adjusted exponential – to find companies with above-average revenue and earnings growth rates.
A catalyst growth screen then identifies companies with an internal (i.e. product) or external (i.e. market environment/development) catalyst with the ability to accelerate earnings growth.
‘On the catalyst side, we’ve got multiple screens, some that are general screens and some that are sector or industry specific,’ Crane said. ‘What you might look for in a retail company would be different than what you might be looking for in a tech company in terms of identifying the catalyst.’
Next, the team digs into the fundamental side of things, which includes reading all filings and old quarterly call transcripts, as well as talking to sell-side analysts and meeting the companies.
‘We have met with just about every company that we own,’ Crane said. ‘Sometimes they come to us and sometimes we have to go to them but it’s always good to sit across the table and to hear from the CEO or CIO what’s going on.’
When talking to sell-side analysts, Crane likes to find the most bullish and bearish analysts to see where they differ. He will also take the most bullish and bearish statements and amplify them by 20% to do exaggerated scenario analysis of how the stock will perform.
Keep it simple
Crane said his desire to cut through the noise and focus on fundamentals had helped the firm avoid mistakes made by the wider market in the past.
He gave the example of the Monster Beverage Corporation, recalling a time in 2012 when the energy drink was under fire because a consumer with a heart condition had died after drinking it.
According to Crane, the stock was down 17% that day and news outlets were covering the story intensely, arguing that there should be more regulation of caffeinated beverages.
‘We talked about it for three minutes and decided that this didn’t change the thesis that Monster was winning the energy drink battle and that there was so much more distribution to be gained,’ he said. ‘The market clearly overreacted… so when we look at it, the stock being down 17% was a gift. We were in there buying.’
The team has held Monster ever since, and it is still a top 10 position in the American Beacon Stephens Mid Cap fund. Perhaps the story could be summarized like this:
Heart attack scandal
Market panics, drinks Kool-Aid
Monster roars back loud.