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Big Ideas, Small Stocks – Barron’s

Sept. 30, 2017 12:39 a.m. ET

Amy Zhang’s introduction to investing came in the form of C++ computer code. As a math and computer science major at Manhattanville College in Harrison, N.Y., Zhang interned at a wealth management firm, debugging a program. The experience piqued her interest in finance. “It was totally new to me—it requires constant learning,” says Zhang, who was born and raised in Shanghai and moved to the U.S. at age 17 after receiving a scholarship to a private high school in New Mexico.

Inspired by the internship, Zhang changed her major to economics, with a concentration in finance. She completed her undergraduate studies in three years, and was accepted into multiple Ph.D. programs and Columbia Business School; she decided to go for the M.B.A., though she deferred her studies for two years to work as a fixed-income analyst. “I gravitate toward complexity,” she says. “I like to take complex things and break them down.”

For the past 15 years, Zhang, now 46, has channeled that skill into finding and vetting small, growing companies. In early 2015, she took over

Alger Small Cap Focus

(ticker: AOFAX) and retooled the fund, which had $14 million in assets, to create a concentrated portfolio of some 50 companies with less than $500 million in revenue when she invests. (She considers revenue a better gauge of size than market value.) The now $537 million fund has returned an average of 10.9% a year over Zhang’s tenure, better than the 8.7% for the Russell 2000 Growth index. It has beaten 83% of its peers in that period, according to Morningstar.

Zhang taps into Alger’s central research group, but works closely with her own team of three analysts and a research associate. Though all generalists, they have expertise in sectors that are the primary focus of this fund: technology, health care, consumer discretionary, industrial growth, and financials (namely fintech).

Investors, Zhang says, shouldn’t confuse small-growth companies with start-ups. Most of the companies in her portfolio have at least a decade of operating history and stable revenue, but are undergoing positive dynamic change—such as a new product or beneficial trend—that offers the potential to double their revenue within five years.

“We want high growth and high quality,” says Zhang, who was a small-cap portfolio manager at Brown Capital Management prior to joining Alger. The fund’s weighted median debt-to-capital ratio is 4%, versus 35% for its benchmark, the Russell 2000 Growth index. Its median 12-month sales growth is 17%, versus 9.5% for the index.

Take


Cognex



CGNX 0.24543223343332424%



Cognex Corp.


U.S.: Nasdaq


USD110.28


0.27
0.24543223343332424%



/Date(1506718800367-0500)/


Volume (Delayed 15m)
:
538657



AFTER HOURS



USD110.28



%


Volume (Delayed 15m)
:
41846




P/E Ratio
50.687135174886244

Market Cap
9523785750.50476


Dividend Yield
0.30830612985128764%

Rev. per Employee
411975









More quote details and news »


(CGNX). Founded in 1981, it’s a leading supplier of machine-vision products for industrial applications. The company initially benefited from the semiconductor boom, but “in 2000, 61% of its revenues were related to semiconductors and today, only 4%,” says Zhang, who initially invested in the stock in February 2015 when it was in the high $30s; it was recently at $110. “They have evolved their core technology over time and are moving into new markets, like consumer electronics, industrial 3-D products, and airport security ID.” The company’s $585 million in revenue for the past 12 months is a fifth of what Zhang figures is a $2.9 billion total addressable market. Cognex has no debt and 29% net margins, she says.

It’s a similar story for


Veeva Systems



VEEV 0.07095973035302466%



Veeva Systems Inc. Cl A


U.S.: NYSE


USD56.41


0.04
0.07095973035302466%



/Date(1506719083405-0500)/


Volume (Delayed 15m)
:
1013453



AFTER HOURS



USD56.41



%


Volume (Delayed 15m)
:
80289




P/E Ratio
67.93929904853667

Market Cap
7927191317.61843


Dividend Yield
N/A

Rev. per Employee
344167









More quote details and news »


(VEEV), which was founded in 2007 and went public in 2013. The company started with customer-relationship management software for the life sciences industry, but now offers a content-management platform that life sciences companies use to store, search, track, and share data, such as from clinical trials. “They’ve started with life sciences, but this platform can be used for any regulated industry,” she says, noting that Veeva has $618 million in revenue for what she says is an $8 billion total market. “They are just scratching the surface.”

Both segments offer high recurring revenue and a competitive moat; switching systems is costly and time-consuming. Veeva has 22% operating margins, no debt, and $725 million in cash. Zhang says Veeva should have no problem delivering 20% revenue growth over the next three to five years.

Another top-10 holding, Insulet (PODD), is building on its proprietary Omnipod insulin-management system, which delivers to Type 1 diabetes patients continuous doses of insulin via tubeless pumps and disposable pods. Zhang points to several growth catalysts, including the potential for Medicare and Medicaid reimbursement; a recent shift to direct sales in Europe; and research into other applications, such as chemotherapy. Also: a partnership with


Eli Lilly



LLY 0.6352941176470588%



Eli Lilly & Co.


U.S.: NYSE


USD85.54


0.54
0.6352941176470588%



/Date(1506718870748-0500)/


Volume (Delayed 15m)
:
3386422



AFTER HOURS



USD85.78


0.24
0.2805704933364508%


Volume (Delayed 15m)
:
119680




P/E Ratio
37.49945201876288

Market Cap
93584066162.1094


Dividend Yield
2.43161094224924%

Rev. per Employee
524236









More quote details and news »


to develop pods for Type 2 diabetes, which is far more prevalent than Type 1. “That could launch in the first half of 2019,” Zhang says.

Shares in


Shopify



SHOP 0.034349506225848%



Shopify Inc. Cl A


U.S.: NYSE


USD116.49


0.04
0.034349506225848%



/Date(1506718923805-0500)/


Volume (Delayed 15m)
:
860449



AFTER HOURS



USD116.49



%


Volume (Delayed 15m)
:
6696




P/E Ratio
N/A

Market Cap
11473462133.4867


Dividend Yield
N/A

Rev. per Employee
267892









More quote details and news »


(SHOP) have more than doubled over the past year, but this go-to e-commerce platform for small- and medium-size businesses has yet to reach its full potential. “This is a way to invest in the fickle consumer,” says Zhang. The company, started in 2004 when its founders set out to start a snowboarding equipment site and found a dearth of e-commerce tools, has no debt and garners nearly half of its revenue from recurring subscriptions.

Shopify has an $11 billion market value, which puts it in large-cap territory, but its potential to grow its $509 million in revenue warrants a spot in Zhang’s fund, which took a meaningful position early this year when it was trading in the $50s. “It’s rare to have a company that not only has very robust unit growth, but is also growing its wallet share, or revenue per customer,” says Zhang. While its core customers are small bricks-and-mortar companies that use its services for everything from web design to payments, Shopify is attracting larger enterprises, including


GE,



GE -0.24752475247524752%



General Electric Co.


U.S.: NYSE


USD24.18


-0.06
-0.24752475247524752%



/Date(1506718815507-0500)/


Volume (Delayed 15m)
:
32542641



AFTER HOURS



USD24.21


0.03
0.12406947890818859%


Volume (Delayed 15m)
:
1131071




P/E Ratio
27.81868384721583

Market Cap
209868616065.228


Dividend Yield
3.970223325062035%

Rev. per Employee
400641









More quote details and news »



Nestlé,



NESN.EB 0.4904306220095694%



Nestle S.A. ADR


U.S.: OTC


USD84.01


0.41
0.4904306220095694%



/Date(1506723600000-0500)/


Volume (Delayed 15m)
:
396714




P/E Ratio
27.736141833668988

Market Cap
259653711897.543


Dividend Yield
2.7192429472681825%

Rev. per Employee
275846









More quote details and news »


and Red Bull, via Shopify Plus.

This speaks to what Zhang says she likes most about investing in small companies: seeing the potential in something and “watching it blossom.” That’s how she views her first decade in the U.S.: “People saw potential in me and invested in my education.”

In 2015, Zhang approached her former college advisor to establish the AYZ Scholarship for incoming freshman from underrepresented populations who intend to study science, technology, or mathematics. Though the advisor still teases her about changing her major, “I think he has forgiven me,” she laughs. “He’s even invested in my fund.” 

Email: editors@barrons.com

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