Episode 407: Don't Underestimate the Power of 'Hidden Compounders'
On this week's Stansberry Investor Hour, Dan and Corey are joined by John Barr. John is a managing director at Needham Funds, where he has served as co-portfolio manager of the Needham Growth Fund and portfolio manager of the Needham Aggressive Growth Fund for 15 years.
John kicks things off by discussing his investment philosophy, what Needham Funds does, and the power of compounding. He says he tries to find companies that are hidden compounders that will eventually turn into quality compounders. This leads John to share the four criteria he looks for when trying to find hidden compounders. He names two such companies that fit the criteria, breaking down the thought process for Needham's investing in each one. Speaking about one of them, LeMaitre Vascular, he comments...
This is a 20-bagger for us. And it has been run by the son of the founder... They have just done an incredible job of getting strong returns, expanding margins, and growing the top line... So this is clearly a quality compounder. It's no longer hidden. The new investments have paid off.
Next, John explains why he's such a fan of family-run businesses and names a power-conversion company he likes that's still being led by its founder. He then discusses what sets Needham apart from other funds, including its preference to hold on to quality companies for a long time – even through 50% drawdowns. And John details how he decides when to actually sell a company, although he notes that he made a mistake with Dick's Sporting Goods...
We had bought it well in 2009 and then got concerned that Amazon was going to take over the sporting-goods category, even though we liked Dick's approach to e-commerce. And so the stock had pulled back, but then it rallied from $25 to $30, and we got a good sale at $30, and then it may have fallen after that. Well, take a look at Dick's right now [trading at around $200], and you will realize that the risk-reward was just completely off.
Finally, John reminds investors to know and play to their strengths. And he urges them to ignore all the noise in the news, as being successful in the markets requires a fair amount of optimism about the future. Talking broadly, John says that Needham has been investing in infrastructure for the past decade-plus and more recently has been looking at defense companies. He names military shipbuilder Huntington Ingalls Industries as a solid pick today. Plus, he names a couple skilled-labor-school stocks he likes, as skilled labor is set to remain in high demand...
They do welding and HVAC and automotive. We have a huge deficit in skilled labor as the workforce retires. And we need them for shipbuilding. We need them for everything. And there's strong demand for these graduates who come out with great-paying jobs. And I think these companies can be a lot larger.
Click here or on the image below to watch the video interview with John right now. For the full audio episode, click here.
(Additional past episodes are located here.)
The transcript is coming soon.
This Week's Guest
John Barr has been the co-portfolio manager of the Needham Growth Fund and portfolio manager of the Needham Aggressive Growth Fund since 2010. He first spent 14 years in the electronic design automation industry. Then, switching to finance, he started on Wall Street in 1995 at Needham as a sell-side analyst following technical software companies. After that, John served as a senior analyst at wealth-management firm Robertson Stephens, as a portfolio manager and analyst at Buckingham Capital Management, and as a member of semiconductor-software company Coventor's board of directors. He is a graduate of Colgate University and Harvard Business School.