BOSTON | A knack for spotting future stars among the small-cap ranks has made Tillinghast one of Fidelity’s best-known stock pickers. Under his management, the Fidelity Low-Priced Stock fund has returned almost 14% annually since 1989.
What is the appeal of smaller stocks?
I always enjoy the detective work of finding something different or new. Stocks that are off the beaten path can have bigger rewards than some of the larger companies. But I’ve been interested in stocks since I was a kid.
How old were you when you bought your first stock?
What stock was it?
A company called Beckman Instruments. My dad was a biologist, and he had a lab instrument made by Beckman that sped up a lot of lab tests. I put about $100 into it. What I didn’t pay attention to was that the stock was selling for something like 35 times earnings. So even though earnings kept marching higher, the stock went down. That helped make me into a value investor.
How has your approach evolved since then?
I realized that estimating value was the most important first step, not finding an exciting concept. I realized it’s all about price to value. After that, I bought a lot of what Warren Buffett would call “cigar-butt stocks,” which are terrible companies at cheap prices.
Do you believe small companies tend to outperform larger ones over the long term?
One of the reasons I got into small-cap stocks is because one of my business school professors convinced me that the smaller you got, the better the results. After all, every big company was once a small company.
It seems like the current bull market has favoured larger stocks.
The past decade has been kind of lousy for small-cap investors. During the ’90s tech boom, there were dozens or even hundreds of ways you could play networking, personal computers and the Internet. Now the market has been more focused on winner-take-all-type companies like Facebook or Alphabet or Amazon. There are not a lot of ways to play it without buying the winner.
When do smaller stocks tend to work best?
Coming out of a recession, they are fabulous because they have gotten so beaten down. The conventional wisdom used to be that they’re more cyclical, so as they come out of the recession, small-cap earnings and valuations snap back.
Considering we’re probably closer to the end of the economic cycle than the beginning, how are you positioning your portfolios?
I’m looking for more resilient earnings streams that won’t get crushed if we do have a recession. There are industries that historically have more intangible assets. Brands matter a lot to consumers. A strong brand can produce high profits and a degree of control over a company’s destiny. For us, Japan has also been a big focus. There’s something like 200 U.S. companies in the Russell 2000 Index that have price to earnings under 13. In Japan, there are 1,300.
Are you finding opportunities in Canadian small-caps?
In Canadian small-caps, there are a fair number of money losers. You’ve got pot stocks and energy services scraping around bottom. Not every company that loses money is junk, but a lot of them are. So this is not a group where you want to own the index. You either want to pick the individual stocks yourself or you want an active manager.
What about Canadian resource sectors?
I hold Canadian energy stocks, because the companies have done a great job of bringing down their cost structure. I would hold a lot more if I saw ways for them to figure out how to transport product to market.
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