Kempton Ingersol’s job is considerably more fun than the average portfolio manager. Ingersol, who is the managing director and senior portfolio manager at Brown Capital Management (No. 13 on the BE Asset Managers list with $1.2 billion in assets), is charged with identifying investment-worthy small-cap companies whose innovative technologies or groundbreaking business models show big promise. Small-cap firms are those whose outstanding shares are valued between $250 million and $1 billion.
Ingersol isn’t fooled by whiz-bang techno-speak. His investment strategy is based on a given company’s ability to grow revenues. “We look at a three- to five-year investment horizon to identify companies with products or services which have competitive advantages that are sustainable over time. We are truly long term,†says Ingersol. In that regard, he shies away from offering 12-month share price targets. “The core of our program contains old-fashioned and rigorous fundamental analysis to identify exceptional small companies that we think can grow to become exceptional larger companies,†he notes. Ingersol spoke to Black Enterprise about the economy and some of his favorite small-cap companies.
What’s your take on the state of the overall economy right now?
I think we’re seeing a lot of mixed signals in the economy. You see some positive information periodically for unemployment data or manufacturing, retail sales, or housing–and then it’s countered with negative data. So I’m not seeing a strongly positive trend yet. Obviously things have improved. But as you hear about the declarations of the recession ending, it doesn’t feel like that for the millions of unemployed people. We’re not yet seeing significant job creation. And that’s necessary to improve consumer confidence and consumer spending.
The types of companies you cover–smaller publicly traded enterprises–are they generally in a position to start hiring and creating jobs?
Yes, they are. We’ve seen a number of our companies over the last year making increased investments within the company, preparing themselves for the future turnaround. So, while there’s been some cost-cutting, there have been areas where they’ve said, “We see an opportunity out there so we are going to increase staffing in research and development, in sales, or whatever is most critical for them. One of the characteristics of companies we identify is that they tend to have a significant amount of cash on the balance sheet, with little or no debt. So that allows them to invest in their companies even during a period when credit is tight.
What’s your forecast for the direction the overall market will take this year?
Well, the significant upside we saw last year, I don’t think we’ll see that strength or magnitude this year. But I do think we could still see measured growth.
What are some companies that fit that mold?
The first company I want to talk about is Neogen (NEOG). They develop a broad line of products focused on food and animal safety. Their products consist of diagnostic test kits for the detection of E. coli, salmonella, food allergens, toxins and any other dangerous, unintended substances, which might end up in the food supply. Their animal safety products include vaccines, vitamins, and various treatments for bacterial and other infections for both animals which will become part of the food supply and for pet animals, including cats, dogs, and horses.
The company also produces rodenticides and disinfectants used in animal and food production facilities.
Neogen’s 2009 revenue was $126 million. The food safety side is approximately 55% of the revenue. The animal safety side is 45%. As food contamination concerns and food recalls continue, that will drive growth for this company. In fact, they recently formed a subsidiary in Brazil, which is one of the world’s largest food exporters, and announced a partnership with the Chinese government to research China’s specific food safety issues. Neogen has consistently grown revenue 15% or more over the last several years. This company is in a very strong position in terms of sophistication of their science and the demand for its products. And at the current revenue level, we think there’s significant room for growth for this company going forward.
Are there other companies with a similar outlook that you’ve identified for your clients?
Quality Systems (QSII). They develop market-leading healthcare information systems, which help to automate medical and dental practices. Companies in the business of medical practice management and electronic medical records software–we believe–are well positioned to benefit from increased healthcare information technology spending, and the effort to reduce medical errors and improve the quality of patient care. It’s no secret that there are big inefficiencies in the medical system. Some doctors’ offices you go into, and they’re still pulling paper files. The company has successfully focused on the small- to mid-sized physician practices and community health centers, a market that is underpenetrated. This company comes in and automates the billing system and the patient information system with different software.
In 2009, Quality Systems increased its sales force and product implementation teams in preparation for increased demand. The company also stands to benefit from stimulus funding and incentives geared toward accelerating the adoption of electronic medical records. Quality Systems has grown revenue over the last five years at a compound annual growth rate in excess of 25%. And earnings have increased at an even higher rate. We expect them to continue to grow revenue and earnings in excess of 20% for the next several years.
And your final pick?
NIC Inc. (EGOV). They provide outsourced Website development and management services to state and local governments. Their services allow governments to provide citizens and businesses with access to information and the ability to complete various government-related actions online including payments, registrations, verifications, or renewals.
When NIC goes in to set up a Website, the government client pays nothing up front. NIC builds the Website essentially for free, and then they get a share of the fees generated from transactions on the site. So if you go to renew your driver’s license or pay your property taxes and there’s a convenience fee built into the cost of the transaction, there’s a revenue sharing agreement.
NIC’s 2009 revenue was $133 million. Over the last several years they’ve grown revenues from existing clients in excess of 10% annually. Texas, Indiana, Virginia, and Colorado are among the 22 states that are clients. In 2009, they added their first ever federal contract with the division of the U.S. Department of Transportation. They are continually expanding the number of services, increasing the types of transactions that can be accomplished online. We believe they’re well positioned to continue to grow revenue and profits–at least at a 15% level–for years to come.
This article originally appeared in the May 2010 issue of Black Enterprise magazine.