Why Abandon a Rising Star?
Douglas J. Levine: What is a rising star? It’s a company whose fundamentals have improved so much that it moves higher in the market cap spectrum. A good example of a rising star stock we’ve purchased is Take-Two Interactive Software – a video game publisher best known for the “Grand Theft Auto” and “NBA 2K” franchises.
The decision to purchase this stock was based on a more diversified gaming offering coupled with growth in its digital business which should drive much higher margins, and of course a strong balance sheet.
Although its market cap has crossed over into mid-cap territory since we acquired the stock, we believe it still has significant upside potential with a strong slate of branded titles, and a solid pipeline for new titles in the coming year. In order to buy and hold stocks like this, which we believe have good expectational upside relative to the market, we offer Pacific Funds Small/Mid-Cap. This fund allows small-cap mangers the ability to avoid the forced selling of individual stocks based on market cap alone.
Tina Jones: Many investors allocate their U.S. equity holdings among both large-cap stocks for their relative stability, and small-cap stocks for their expectational upside, but – in doing so – they fail to recognize that this rigid approach may force them to make reallocation decisions based on an arbitrary market-cap cutoff rather than on investment merit.
But what happens to the opportunity offered by small-caps when they grow into mid-caps? Managers of small-cap funds are typically obligated to abandon them – even when they have not reached their full potential.
But why sell stocks that have consistently outperformed their smaller and larger peers over time?
Small/mid-cap managers are uniquely positioned to identify these rising star stock opportunities early in a company’s lifecycle, and can hold them so they may reach their full potential. In addition, mid-cap companies – in general – have more seasoned management and more attractive risk/return profile than their small-cap peers.
Each of these reasons we offer Pacific Funds Small/Mid-Cap – which allows investors to continue holding these rising stars.