Leah Zell - Lizard Investors [PDF]

www.WellingonWallSt.com VOLUME 3 ISSUE 18 DECEMBER 12, 2014

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Tiffany’s Boxes Leah Zell’s Lizard Investors Searches Globally For Gems Amid Small Caps Leah Joy Zell is no stranger to superlatives. She picked up a bunch of prestigious fellowships, as well as a doctorate in European history, in her student days at Harvard, before turning her attention to the “family business,” making gobs of $$$ in investments.

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Forbes dubbed her “The Queen of Small Caps” back at the turn of the century for the consistent double-digit performance of the Acorn International Small Cap Fund, which Leah started not long after she and her ex-, Ralph Wanger, spun Wanger Asset Management out of Harris Associates in 1992. In what was some of the best financial markets timing, ever, they sold that mutual fund business for cash in early 2000. Now Leah is running her own value-oriented hedge fund shop, Chicago’s contrary-to-the-core Lizard Investors — and it’s a bit of a departure for her. Unlike WAM, money hasn’t poured into Lizard in torrents. Unlike WAM, Lizard isn’t investing in the hottest sector in a bull market. Since the financial crisis, domestic large caps and passive megafunds have decidedly been the place to be. But Leah, and Lizard, remain laser focused on finding under-appreciated small-caps outside of the U.S. For the money, of course, because that’s how you keep score. But mostly for the sheer excitement and fun of

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When I caught up with her early this week, Leah graciously took me on a tour of the ever-evolving asset management firmament — and several of her distinctly non-mainstream opportunistic stock picks — in the process, explaining why she expects her “stubborn” persistence in mining her capacity-constrained niche strategy to ultimately be rewarded by the market gods. Listen in. KMW Leah, you aced the mutual fund business, as a cofounder of Wanger Asset Management and PM of its international fund, in the 1990s. And now it’s been almost six years since you launched your own hedge fund group, Lizard Investors. How do the experiences stack up? Leah Joy Zell. Totally differently. It’s partly the environment. Obviously, the asset management industry is rapidly going ex-entrepreneurial, for the time being. By contrast, when we started Wanger Asset Management in 1992, we were in the midst of a great bull market and WAM actually was a lift out of an existing profitable business from Harris Associates. We took $1.8 billion in assets with us. So, while it was an entrepreneurial venture, it was not a startup. I’d describe it more as plug-and-play. Leah Joy Zell

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The consequence was that 15 months later, we had $1.4 billion under management and I was doing what I would call spaghetti investing — throwing it up against the wall to see what sticks. It was a wonderful experience that I never expect to repeat. So I closed the fund to new investors and actually started building a team and infrastructure. Nobody who sent money our way asked me whether I had those things beforehand.

ing, intellectually, fulfilling — and fun — to be building this business, myself, from the ground up. But I don’t want to give the impression that I’m a Lone Ranger at Lizard. We are a team.

We? Both Jonathan Moog and David Li joined me as analysts before we launched the fund, in 2008. Jon is 37, David will be, in March. Jon has just taken over managing our investment process on a “I’m contrary. I know the U.S. market day-to-day level, which is freeing me up enormoushas been the best-performing market, ly to think about themes and guess what, I do non-U.S. equities. and markets. He’s really responsible for keeping I couldn’t be a bigger professional the trains running on time. David is indismisfit, what can I say? pensable for his encycloBesides, what I do does not lend itself pedic knowledge of our universe of potential very well to passive investing. investments. Plus, we’ve I specialize in small-cap equities, just hired two new which are a niche strategy that lend investment professionals.

themselves to active management — and that should offer the opportunity for alpha creation.”

Those were the days to be in the mutual fund business — Yes, and so lovely. This time around — Wait. Which was more fun — watching the assets pour in or selling that business at the market top? Well, we did sell the business based on February 2000 numbers. I really think that there is some guardian angel up there in the firmament who looks over me with regard to timing. The launch of Acorn International clearly was very fortuitous. Selling the business in the spring of 2000 and having the check clear that summer was also very fortuitous. Getting paid in cash was very nice. You can think of that as a gargantuan short on the market in the summer of 2000 — thank you very much, guardian angel! Finally, I launched the Lizard International Fund on January 1, 2009, and that also was pretty good timing in terms of market valuations. So this is the opposite of three strikes, you’re out. This is three strikes, you’re in. Quite comfortably! So why are you still coming to the office every day? This is the last venture. It’s incredibly challeng-

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December 12, 2014

This is all very important to me because the investment management business by definition is an apprenticeship business. It’s not something you can learn in business school. Shhh. Don’t tell Harvard et al! It’s something you learn on the job from people who have been doing it. This requires a passing of the baton from generation to generation. In my prior iteration, at Wanger Asset Management, I was that generation to whom the baton was passed, and I had a great opportunity for which I will be forever grateful. Now, I’m enjoying very much watching this process repeat. But this time around, I am the one empowering people who are mid-career, with a dozen years of experience — and I expect to be watching them down the line, when they start to train the next generation. Still, you scarcely have to work as hard as you do. Don’t need the airline miles — What else would I do? Besides, this experience is giving me enormous respect for the entrepreneurs who create the kind of small-cap companies I invest in. Fresh appreciation for what they go through, because every new organization really does go through a period of trial and error as it finds its footings. We certainly have.

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But your international fund was new then — Right, we started the Acorn International Fund in the fall of 1992 with $6 million of seed money. We were the best-performing international mutual fund in the country our first quarter in existence, partly because we launched the week that George Soros broke the Bank of England. It’s better to be lucky than smart!

Really? You do realize the investment world is increasingly dominated by megafunds, passive indexers, ETFs and that awfully institutional ilk? Well, whenever the world is on the right side of the boat you want to be on the left side, no? Sure, but with a life vest — I’m contrary. I know the U.S. market has been the best-performing market, and guess what, I do nonU.S. equities. I couldn’t be a bigger professional misfit, what can I say? Besides, what I do does not lend itself very well to passive investing. I specialize in small-cap equities, which are a niche strategy that lend themselves to active management — and that should offer the opportunity for alpha creation. Why? If for no other reason than that as a portfolio manager you are always just picking a very, very small portion of that universe and there are always opportunities, and always companies that are growing, regardless of the macro environment. There are also structural developments in the asset management industry that I think, over time, favor small-cap equities.

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How small are the capitalizations you’re talking about? Our median market cap is usually between $1 and $2 billion. We try to keep it below the $3 billion level. So, while we have a couple of $5-to-$10 billion market cap companies, we have more $500-, $600-, $700-million companies. Outside of the U.S., of course, it is much more typical for there to be dominant shareholders, so we really have to look at the float, rather than purely at the market cap. Then how big is your universe, really? Interestingly enough, about 85% of all listed companies globally have market capitalizations below $1 billion. And of those, some 70%-plus are listed outside of the U.S. That’s a very large number. But you can probably eliminate half to two-thirds of those companies from consideration for our portfolio universe, simply because they are not really investable. That’s why the indices for the various markets are usually defined as “investable.” For example, in India, it is tax-advantageous to be publicly listed. So you have lots and lots of companies that are publicly listed, but not really investable. In fact, most private equity players in India invest in those sorts of publicly-listed companies because they are, in effect, the equivalent of private companies elsewhere.

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So where do you see asset growth for Lizard — besides performance, of course? Well, I’m leaving tomorrow for Australia. I am

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What have you learned through that? Over the last five years, post-financial crisis, the industry has changed quite a lot. In dealing with and reacting to that, we haven’t tried to go with flow. Instead, we have become very clear at Lizard as to our objectives and as to the environment. And we’re very optimistic about maintaining our positive trajectory. We’ve quintupled Lizard’s assets since we began. Of course, we didn’t exactly start with an enormous number — just under $50 million. Raising money in the fourth quarter of 2008 was, in and of itself, an art! But if we can quintuple the assets again over the next five years, I will be a very happy camper, and I do think that’s eminently achievable.

Another case of lucky timing? I think that Australia should be a good market for us. I hope it will be a good time for our future investors there to get into Lizard. Malcolm Gladwell, in “Outliers,” made a great point about the luck of being in the right place at the right time. There are a lot of people who are there but who don’t take advantage of it. So you’ve got to be in the right place at the right time — and you have to be willing to jump. Besides, if you aren’t having fun you shouldn’t do it, and this is fun.

negotiating a joint venture with an asset management firm there. I’ve known the firm’s principal for 15 years. We will be, God willing, managing a global small-cap product for him. He will be doing the marketing and the back office for us. I think it’s a marriage made in heaven. Very long-distance, though. What makes Australia that attractive? The Australian market is extremely attractive for at least a couple of reasons. First, its universal superannuation scheme — imagine if American retirements were fully funded with compulsory investment flows — Second, Australia has benefitted enormously from the growth of China. In 2009, China became Australia’s No. 1 trading partner. Australia, of course, has the finest iron ore and coal deposits in the world. But its economy has diversified as well as grown amid the commodities boom, so that today exports are only about 30% of Australia’s GDP, compared with 70% back in 1970.

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Still, a now-slowing China isn’t exactly good news for Aussies — The Australia economy is probably facing a somewhat painful adjustment. Even though China most likely will continue to buy commodities from them, the prices will be lower and the amount bought is not going to grow the way it did. But imagine how it looks to an Australian investor, who probably has over 50% of his assets invested in Australia, because it has gone 20 years without a recession. He’s probably considering moving a little bit of money out of

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December 12, 2014

Despite the trial and error you alluded to? Yes. You asked what I’ve learned. As I look back over Lizard’s first seven years (including the one it took to get up and running after my non-compete expired), I’ve come to two realizations. The first realization is that the barriers are breaking down between “alternative” assets and “long-only” assets. The boundaries are blurring both as longonly managers try to get into the alternative space and as alternative managers launch long-only products — and that’s indicative of where the entire industry is moving. So the way I think of who we are is that our core competency is in knowing our universe — we’ve spent an awful lot of time developing institutional knowledge of that universe. Our core competency is not running a hedged or an unhedged product. Meaning you can do it either way? You can do it either way and you can do it along a spectrum. You can do it as a highly-hedged product, you can do it as a long-biased product, or you can do it as a long-only product. Though I would not say that running a highly hedged product is really our core competency — because of the special challenges in shorting small-cap equities. Even if a business is lousy, there can always be someone who comes along thinking he’s buying a bargain and willing to pay a price high enough to give you a black eye. So shorting small-cap stocks is something one does very cautiously, particularly in foreign locales. But we do it — and we’re getting better and better at it. There are other ways to hedge — Well, we definitely hedge currencies. At this point we’re 80% hedged to the U.S. dollar — thank you very much. And yes, you can buy puts and there

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Australia, both to reduce his currency exposure and to broaden his geographic reach. So, voilà, here comes Lizard. We hope to launch towards the end of the first quarter.

What’s your second realization? Post the financial crisis, the alternative space has become highly institutionalized. It had been heading in that direction anyway. Yes, but if one were to look back a dozen years ago, the hedge fund founders were the entrepreneurs of the asset management industry. You had a couple of star names who went out, started their own shops, and made an implicit bargain with their investors, which was: “We all know that the weight of capital is the enemy of performance, so I will take in less capital in exchange for earning a performance fee on my returns.” As recently as 2002, 80% of the capital that funded the hedge fund industry came from the “smart money,” meaning from high-net worth individuals and family offices — investors who are looking for absolute returns. And institutional investors really weren’t heavily or broadly represented among hedge fund investors. There was Yale’s David Swenson, of course, who was an early mover. But institutions supplied only about 20% of the total hedge fund pie. My, how things have changed. Exactly, 2008 was a watershed in the business. I have all this in charts and tables that I used for a recent Ira Sohn Conference presentation in London [first chart, opposite]. High-net worth individuals and family offices peaked as contributors of hedge fund capital, both in percentage and in absolute terms, in 2007. Fast-forward to today and they have not even regained the level that they were at prior to the financial crisis. So you’ve had, in effect, a withdrawal of capital by that segment of the market. Meanwhile, institutions during the financial crisis did absolutely the opposite. That is, they doubled down. So today, institutions manage twice as much money in hedge funds as high-net worth individuals and family offices. They have about 65% of the pie but they actually are providing perhaps 90% of the incremental dollars to the hedge fund industry. So who’s the smart money now? Well, for the institutions, turning to alternatives seems to make a lot of sense, if you look back at what happened during and after the financial crisis. They got burned first of all by the volatility. Second of all, by Madoff and the fact that there

wasn’t sufficient due diligence on the operational side. So there has been this big push for liquidity, transparency, predictable returns. Finally, fixed income, which had been the core of an institutional portfolio, has been a disaster for them. The return that they can get on high-quality fixed incomes has dropped below the actuarial return that institutions need to earn to meet their obligations. So now, when institutions come in to do their due diligence on a fund manager, what they really want is — first of all — no down years. Second of all — No, seriously. I know. I’m just laughing at the impossibility of that dream. You’d think that they’d have learned, after Madoff exploited it so blatantly. Well, to some degree, the absolute return and highly-hedged long/short funds are substituting for what used to be the fixed-income allocation in institutional portfolios. Prior to the financial crisis, long/ short hedge funds were sold as ways to outperform the market because the presumption was that you made money on both the long and the short sides. But today, what hedge fund managers are really being asked to do is to match the actuarial assumptions that the institutions are using — on a consistent basis. They’ve become bond substitutes. And God forbid a hedge fund scare them by making too much money! Well, now the alternative space has become much more — institutionalized. And, where the capital providers are more typically institutions, I understand that they need capacity. If you have a $20 billion corpus, you need to write big tickets. You don’t

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are all sorts of ways in which you can in fact protect capital, and one ought to — if your orientation is capital preservation.

Now, that doesn’t mean I can’t manage a lot more than I am today! Try me, I’ll manage considerably more than I’m managing — but $10 billion is out of the question. It simply doesn’t make sense for the strategy. So that’s the bad news.

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want 150 managers, you want 30 managers. You need to be able to give each manager $100 million, $150 million, $250 million. But this means that the amount of money that’s being given to alternatives managers is much larger than it was in, say, 2002, when it was far more typical for a family office to turn over $5 million to a hedge fund. So we’ve seen a huge change in asset flow [See table page 5]. When institutions are turning over those huge sums to alternatives managers, they want robust organizations because their mantra is “No More Madoffs.” When you take a look at where the money has gone, managers in the alternative space with in excess of $100 billion under management have increased their market share by 88%. As the table illustrates, in 2005, the megafunds were about a quarter of the universe and now they’re half of the universe, and everyone who manages less money than that has lost market share. So I would argue — Bridgewater is now above $100 billion, AQR is now above $100 billion — these are the big asset management firms of the future. If there are two or three of them now, in five years there are going to be 10 of them. Are you implying Lizard will be among them? Not a chance. Then why am I talking about this? You’re insanely jealous, perhaps? Yes! It goes back to small caps, actually. I run a capacity-constrained strategy. If my median market cap is below $3 billion and I have a lot of companies that are $500 million in market capitaliza-

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What’s the good news? Very simply, that my universe is orphaned. There are more and more companies that I look at that have essentially no institutional shareholders — or only local institutions. My international small-cap universe just isn’t traversed by the brand name asset managers who are predominantly U.S.-based. That means the valuation gap is growing — and there’s more fun stuff to do. That’s what I meant about structural changes in the industry favoring small-cap investors. You clearly don’t have to worry a lot about flash crashes, since your small caps, by and large, aren’t liquid enough to attract high-frequency traders. Right. There are some ETFs that own some of my names, but they also own all the dregs of those markets that I won’t buy. I actually can’t remember the last time a trader told me that my stock moved around because of high frequency trading. Anyway, when I did this talk in London for the Ira Sohn Conference, I put a Tiffany box on my opening graphic to illustrate that very often size and value can be inversely related. “Good things come in small packages.” Hope my husband reads this before Christmas! It’s my mantra. Since I’m small, I can relate. Besides, I obviously love investing in small-cap stocks, otherwise I wouldn’t still be doing it after all these years. But what makes them so alluring? I spent some time thinking about that as I prepared that Sohn presentation. The first three reasons I came up with are pretty obvious. More choice, less Street coverage and hype, greater geographic diversity. But the phrase that really sums it up for me is that they offer entrepreneurial optionality. What do you mean by that? Although, at this particular juncture, the asset

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tion and if they then have a couple of really sticky shareholders so that they trade all of $5 million a day — the bad news for me is that it’s very hard to get large allocations precisely because I’m not able to manage exceedingly large amounts of money in my strategy.

Second, because you’re investing in lower profile companies that fall beneath the institutional radar screen, you get to be an entrepreneur yourself by finding them early. I think that’s in my DNA. It may be in my family’s DNA. Who knows? It’s pretty clear you must have been fed investing tenets in the nursery. Presumably. I hate to think how my parents raised me! Let’s not go there. But the evidence is pretty clear in your career — and Sam’s. Well, among the traits of great investors — and of people who build great businesses — how many times did Jeff Bezos fail before starting Amazon? Their great advantage is that they have persistence. But the great disadvantage of entrepreneurs is that they’re stubborn as hell. Enough about you and me! So tell me where you’re managing to find great opportunities in a global investment environment that hasn’t been especially welcoming outside of the U.S.? There’s no question that non-U.S. markets have performed horribly since the financial crisis. This has definitely been a period when the U.S. market has been the place to be, especially for macro or index investors. But one of the bellwether characteristics of smallcap investing is that you buy companies, not countries. Granted, every once in a while something happens on a macro basis that gives you a huge wind at your back. In emerging markets, it’s almost always a political change. I have yet to figure out how to predict that. But when it happens — You’d rather be lucky than smart, again? Well, for instance, we had a stock in India earlier this year, which we had bought at the end of 2012. It is called Balkrishna Industries Ltd. it and makes replacement tires for large agricultural equipment and mining gear. It was so down and out when we bought it, oh my God! And all of India was so down and out. When I typed the order into the trading desk, I think my hands shook. Then lo and behold, [Prime Minister Narendra]

Modi gets elected. Our average price on the stock was about 250 rupees and I sold it this summer at 750 rupees — Thank you very much. On that sort of macro level, it is all about being in the right place at the right time. Which mostly has been in the U.S. for quite a while now — Right, if you look just at valuations — particularly this year with the strength in the dollar — the disparities between performance in the U.S. and performance outside the U.S. — it’s one of the times, like 2011, when the performance divergences are quite stretched. The U.S. market is now up about 12% with dividends. While even the German market is in the red. Germany is down 6%: so there you have an 18% spread. Places like Portugal and Greece are down 25%. Russia is — well, I don’t know that I would put money in Russia, but that’s a different subject — it’s down around 40%. You were pretty clear — and spot on — about avoiding Russia in October, when you closed a letter to your clients by writing. “Buying distressed assets is a time-honored practice of value investing, provided the causes of distress are perceived as temporary or the share prices on offer are so compelling as to compensate for the risk. In the case of Russia, the macroeconomic environment is deteriorating rapidly, making it hard to predict what happens next. Putin’s ability to hold onto power is not certain. We have done our homework, but like lizards on a rock, we are watching and waiting patiently.” Yes. I’m still waiting. Meanwhile, Japan also has underperformed nominally, but the yen has been

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management business is becoming less entrepreneurial, small-cap equities offer entrepreneurial optionality in two regards: First, you get to find entrepreneurs and invest with them as they grow their businesses. It’s very exciting and interesting if you can find owners with passion — you can watch them create something.

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extremely weak — the dollar is up about 10%11% against all of the major currencies year-todate — that’s partly why I’m so hedged. In any event, in local currencies just about every major market outside the U.S. is down, and the divergences range between, call it 15% and at the extreme 40%. But, you know, markets do revert to the mean. That’s one thing that makes me feel, as an asset allocator, that you have to look very seriously at getting some money outside the U.S. Sure, but what did Keynes say about pricing staying irrational longer than you can stay solvent? No argument. But look at valuations — let’s take price-to-EBITDA. The S&P is at about 9.4 times, as of the end of November. The Euro Stoxx 50 is at 5.95: so that’s 63% of the U.S. valuation. And that’s about where Japan is, too, depending on whether you look at the TOPIX first section or the TOPIX second section. That average is about six times EBITDA. If you look at price-to-book, the U.S. is at 2.8 times; Europe is at 1.5; Korea is at one times. Japan is at a little over one times. So either the rest of the world is under-earning massively — one could make that argument, they are certainly under-earning to some degree — or these valuations disparities can only get — you can only stretch the rubber band so far.

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Yes, but as you said earlier, timing can be everything. Technically, there’s no argument for making a massive asset allocation switch, but on a valuation basis — the Bank Credit Analyst is making a strong argument that this period is like the late’90s, when the U.S. market was ascendant and the U.S. dollar was ascendant and value guys were all being fired. Maybe today, you just replace “value” with “non-U.S.” You’ll recall that once the dot.com bubble burst, the best place to be from 2000 to 2003 was in value stocks, in small-cap stocks, and then increasingly in foreign stocks. So these things go in cycles. Yup. Meanwhile, even if the Fed is eying a rate hike, every other central bank in the world is as easy as can be — Which takes you to why the U.S. dollar has been so strong. If you looked at the European Central Bank’s balance sheet at the height of the European sovereign debt crisis, even though [ECB President] Mario Draghi was talking a lot about expanding its balance sheet while we kept on doing quantitative

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easing, he actually did little. So the euro went to 138 to the dollar and suddenly eurozone inflation has fallen to less than 0.5% — even though its target is 2%, just like ours. So Draghi is now, as usual, trying to convince the Germans to do the right thing, which he always eventually does — albeit always too late. So now Draghi has committed to expanding the ECB balance sheet and the euro — surprise of all surprises — is now closer to 123 to the dollar. That’s a big move, from 138 to 123. We’re almost back down to the level where the euro was trading at the depths of the European sovereign debt crisis. What that reflects is anticipation that interest rates in the U.S. will go up and interest rates in Europe will stay very low. At the same time, [Bank of Japan Governor Haruhiko] Kuroda, who took over when Shinzō Abe was elected Prime Minister, would compete with Joe Stiglitz as a money printer. It wasn’t so long ago when the yen was trading below 80 to the U.S. dollar, now it’s trading at 120 to the U.S. dollar. Overall, again, the dollar has moved up about 10%-11% year-to-date. But currency by currency, the yen has been the leading indicator. Currency trends can last a long time — True, but I’m not making a novel observation at all when I note that currency and stock prices tend to be inversely related. When we started the Acorn International Fund in the week that George Soros broke the Bank of England, the reason we were suddenly the best-performing international fund was that when the European monetary snake was broken and all the European currencies dropped precipitously against the U.S. dollar. That was highly stimulative to those economies and those companies. So that’s what’s coming down the pike. Well, you do have a doctorate in European history. But a whole lot of folks are betting Europe won’t snap back this time — Yes, I’m an old German hand. I always have been and always will be. But this talk that Europe is going to go the way of Japan — I don’t buy it. I don’t buy it because Japan is a homogenous population with a fatalistic culture — and a collectivist or conformist mentality. Germany has been the locomotive of Europe because the Germans like to make money. The Japanese don’t. It’s a fundamental difference. For that reason, if the German economy starts to slow down, yes, I do believe they’ll come around. And

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So you don’t expect a dramatic announcement, but you do expect significant easing? And when it happens, the European markets will start to take off — With the caveat that I make no predictions. That sure sounded like one! Well, when we do an interview again in umpteen years, I want to be able to look back and say, “See, look who got it right.” So you’re hedging your bets? At this point I would stay hedged on the currencies. You’re going to have to see a pick up in economic performance — both in Japan and in Europe — before you’ll see the currencies recovering meaningfully. In the currency markets you tend to have big moves and then you have basing. We haven’t gotten to the basing yet. You might get countertrend rallies, but if you’re a long-term investor that’s not what you focus on. Trading on interim rallies is not my game. Which reminds me that we should mention another way in which you’re an atypical portfolio manager these days — you’re opportunistic but don’t trade frenetically. No. We turn our portfolio over maybe 30%-35%, a maximum of 40%, a year. So our holding period is two-and-a-half years, on average. How does the big drop in oil prices figure into your investment outlook? All of this, of course, is interrelated. Sure. The world mostly pays for oil in now-increasingly dear dollars — But the part of the oil story that’s not interrelated is the effect of the shale revolution in the U.S. and the amount of excess oil that’s being produced here. That’s a supply shock. Which is being combined with relatively weak global economies — so consumption has not grown as robustly as had been anticipated. The emerging

markets, in particular, had been expected to increase their consumption of oil. Well, their currencies have been going down faster than the currencies of the developed markets. So you have rationing by price which exacerbates the supply glut. And now we have the Saudis, who historically have been the swing producers, cutting back on production in order to keep market share. Much to the disappointment of other oil exporters — Well, with the amount of oil that’s being produced as a result of the shale revolution, one could argue that the Saudis are facing a choice between market share and price. They can maintain their market share by keeping pumping, or they can cut back on production and keep prices up. And, while I clearly haven’t been an insider in OPEC’s discussions, I would say that the Saudis — with among the lowest costs of production in the world — have decided to opt for defending market share. So oil is going to be weak. And with oil weak, there are winners and losers. With Russia prominent among the latter — Russia, Venezuela, Nigeria. These are all countries that are on the short end of the stick. The oil importers — Japan, India and also Europe, which imports gas — are all doing better, and lower oil prices there are equivalent to a tax cut to consumers. So in general it should be — it’s again like lower interest rates — all things being equal, which we know never is the case — lower oil prices are stimulative. Not a bad thing in a world that’s been noticeably short on economic stimulus. Yes, we’re living in a period of inadequate demand. And lower oil prices, to the extent that they put money in consumer’s pockets, are an antidote to insufficient demand. Maybe we’ll even get a few Russian oligarchs buying houses in Aspen. When they tire of Manhattan penthouses? Well, cold-weather people flock together. I’ll just note, though, that when Putin initiated his adventure in Ukraine, oil was comfortably above $100 a barrel — whether you were looking at WTI or Brent — it’s now below $60. So I suspect that you’re going to see fewer dollars coming out of Russia. If anything, there’s a real risk of a balance of payments problem, or ultimately of capital controls. So far, Putin’s propaganda machine is working very well, and the Russians are very nationalistic. But Russia today is not the Russia of 1989,

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it did look, beginning in August, as if the strong currency and its drag on the European economy — the fiscal austerity — it was imposing was starting to crimp German growth. So I see Germany coming around. There will undoubtedly be smoke and mirrors. So, on a headline basis, it won’t look that way. But guess what, Draghi can start buying covered bonds and then he can start buying corporate debt and eventually he will buy sovereign debt. That’s my prediction.

Okay, let’s turn to where on earth you are finding intriguing small-cap value stocks. Please tell me you didn’t really talk about a finance company called “crook” at the Sohn conference. I did, because I think it is really an interesting debt collection company, and — So it specialty is breaking legs? No, no, no! The company’s name is Kruk, spelled K-R-U-K. The founder of the company is named Piotr Krupa and “kruk” means “raven” in Polish — there’s a raven in the company’s logo — so I don’t really think that before he called the company “Kruk,” he thought about the possible associations it might have in the minds of English-speakers. Anyway, this company is headquartered in a town called Wroclaw, Poland. I’ve actually been there.

when the wall came down. Implying? I’ve heard [former Secretary of State] Condoleezza Rice talk about how, when she lived in Russia in the late-’80s, people were excited to simply get cheese — but now they complain when they can’t get mascarpone. So far, Putin has held his popularity. But he is walking on a thin edge and we’ll see how that comes out.

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You’re clearly leery. As I said before, I’m not excited about investing in Russia here. There are a lot of reasons, one of which is that there is a very limited number of public companies that you can buy in Russia. Most of them — 70% of exports — are oil- and gas-related or energy-related or commodity-related, and 50% of the state budget depends upon rents that come from the energy sector. So to invest in Russia, you either are going to be buying oil companies — and we just don’t do commodities, regardless of what is going on in the price of oil — or one of the few really fine non-energy companies there. But those couple of companies are where all of the emerging markets investors are hiding now, so their valuations remain elevated. Plus, investors have considerable geopolitical risk in Russia. Let us not forget that the largest repository of nukes in the world outside of the U.S. — I assume, I don’t know exactly how big nuke stockpiles are in this country — is Russia. Loose nukes are the real geopolitical risk in Russia, and defusing the tensions will have to be done very, very carefully. We need Russia as a geopolitical player, as a partner in negotiating with Iran and in resolving the situation in

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Is it near Warsaw? No. It is the largest city in Western Poland and used to be called Breslau. It has the sort of complicated history common in that part of the world, and once was a fairly large German city. Actually, it had been Polish, but when Frederick the Great and Maria Teresa and Catherine the Great carved up Silesia in the 18th century, it became German and — anyway, it’s now Polish again. Kruk, I assume, hasn’t been around nearly as long as that! Right. This company was founded in 1998, it has a market capitalization of just under $600 million (U.S.). About 10% of their business is collecting consumer loans, on an agency basis, for financial institutions. This means that a financial institution will give them a portfolio of bad loans and they’ll have a finite period of time — three months or so — to collect as many of them as they can, for a fee. Then they give the portfolio assets back to the financial institution, which retains ownership of the loans. What’s the rest of the business? About 90% of their business is actually acquiring nonperforming loans from financial institutions. Although that sounds asymmetric — 10%/90% — the two sides of the business are actually synergistic. Typically what happens is that after trying to get its bad loans settled on an agency basis, the financial institution goes back, takes the loans that were not easily collected, packages them together and auctions them off for pennies on the dollar. Kruk wants to be in the agency collection business

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Syria — there are a lot of moving parts.

Is Kruk strictly a Polish company? No. They get about 60% of their revenues now from Poland; about 33% from Romania. Then, they have some business in the Czech Republic and Slovakia. Is it reasonably liquid or do the founder and his friends really control the float? He still owns 13% and members of his management team own 2%: so they have a 15% combined stake. The core investors here are Polish pension funds. So far, we have not seen a top-tier bank write up this company. It definitely qualifies as under-the-radar, even though it’s scarcely the only company in this business. There’s a company in the U.S., called Portfolio Recovery Associates — PRAA is the ticker — and there’s a company out of Stockholm, Nordic Capital. There’s also a company that just listed in London, called Arrow Global. While it’s a fairly well-developed industry in the U.S., it’s still relatively nascent in Europe. In fact, I would argue that it has even more potential in Europe than here, because Europe is more of a banked economy. In the U.S. we have a much more developed capital market. In Europe the banks are much bigger, relative to the size of the economies. Meanwhile, post-financial crisis, there’s increased pressure on the banks from regulators to up their shareholder capital and to get rid of their nonperforming loans. So the debt collection business is developing rapidly in Europe, and Kruk is poised to benefit.

ing loans. You need to have relationships with financial institutions. The financial institutions need to make sure that you are a credible counterparty — they don’t want shady practices or a bad reputation coming back to bite them. The next thing you need is a disciplined bidding process. You for sure don’t want to overpay for portfolios of bad loans.

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What are Polish nonperformers worth? Well, Kruk isn’t paying 50 cents on the dollar for these portfolios. It is paying anywhere from 8 cents to 20 cents, depending on the credit worthiness of the underlying investors. Their bids also vary by the type of loan and by country. So Kruk is pretty savvy about the credit

How so? This is by nature an oligopolistic industry. The small guys really can’t compete because they don’t have the ability to price portfolios properly. So every once in a while they drive prices down and then perform poorly — or go out of business — because they priced the portfolios too cheaply. On the other hand, the big companies don’t want to grow to capture 50% of the market, because that, almost by definition, means they’re overpaying for loan portfolios. Against that background, you need a number of things — which Kruk has — to be successful.

Kruk’s proven track record of organic growth

Like what? One is economies of scale. You need to have access to financing at favorable rates because obviously, you borrow in order to buy the nonperform-

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because it gives them an opportunity to really take a good look at the institutions’ portfolios of bad loans, before they come to market. So when those loans are packaged and do come to market, Kruk knows what it is buying.

standards and the underwriting capabilities of the banks selling this paper? Yes, there is an art as well as skill involved in pricing these portfolios. Kruk has a team of 40 employees who do nothing but price bids and develop statistical methods for valuing these portfolios, regardless of where the selling bank is located. One of Kruk’s advantages is that, while they are located fairly near the German border, all their employees are Polish and they’re getting Polish wages. Subscribe to WellingonWallSt. Please contact. Stuart Schwartz [email protected] (914)768-3133

Another is that, because they’ve been doing this for over a decade, they have a database of 2.7 million debtors and — surprise of all surprises — names come up again. There’s a joke there somewhere. But how does Kruk convince former Soviet citizens to

What is their carrot? Kruk owns a credit bureau in Poland. So they can credibly hold out the promise of repairing the credit ratings of good payers, so that they’ll be eligible for lower rates on future borrowings. In fact, Kruk goes to the courts only as a last resort. So “coddling” debtors works for Kruk? Well, we have many years of data now on their collections. They usually collect 100% of what they pay for a portfolio of nonperforming loans in the first three years. But they can continue getting cash flow from that portfolio for up to 8 – 9 years. So since 2005, they have recovered 2.75 times what they have paid for their portfolios. The cost of collection is typically below 30% of recoveries, and Kruk’s historical unlevered returns have been above 20%. They do that with two-thirds debt, one-third equity. So if you take a look at their operating track record (table, page 11), they have grown the fair value of their purchase portfolio since the financial crisis by over 40%. Kruk’s cash EBITDA — which is literally cash in over the transom — has grown at over 30%. Return on equity has been above 26% on average ever since 2009. My financials should look so rosy. No wonder you like Kruk. Actually, the real reason I am so optimistic about this company’s outlook is that I see a variety of ways in which they can grow. If all they do is keep collecting retail consumer loans in their existing core markets, they’ll grow in mid-single digits and they’ll have a very nice business. Interesting but not terribly exciting. But Kruk is going into a brand new market, which is mortgage loans. They bought one large portfolio of mortgages at the beginning of this year — and they just recently announced a second. Again, this is an area where regulators are very interested in seeing banks clean

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repay loans? Break legs? I can assure you that, to my knowledge, they don’t break any kneecaps. They do not employ thugs. They are actually your friendly, teddy bear debt collection company. They advertise in the media, presenting themselves as the debtor’s friend. “We understand you’ve gotten yourself into a pickle and we really want to help you get out of that pickle.” They really mean it. They have local representatives who go sit down and talk to debtors. Help them consolidate debts and come up with a schedule of installment payments so that the debts can be repaid over time. And they have a carrot to encourage compliance.

A little farther out on the horizon, Kruk could also enter the market for small-to-medium-enterprise corporate loans. So they can go into new verticals. They can also go into new geographies. They established a subsidiary in Germany in August, and for the first time did a euro-denominated bond offering to finance the purchase of nonperforming loans in Germany. (Poland is not formally part of the eurozone, although the Polish zloty is quasilinked to the euro.) Does a Polish company really have a shot at breaking into the German financial market? Well, Kruk already competes against most of the German players in the Polish market. They know them and feel they can do well against them on their home turf. Kruk will probably end up paying more for loan portfolios in Germany, but the German economy is so much bigger that Kruk potentially could see a lot of growth there. This is a company that has created value since it was founded; will continue to create value; is listed in Warsaw. Intrum Justitia, which bills itself as Europe’s leading credit management services company, trades in Stockholm at 17 times its latest 12month earnings. Kruk trades at 13.5 times and has a better return on equity and terrific growth potential. Which brings me back to what I said about the oligopolistic nature of this industry. You’ve lost me. Kruk has said they don’t want to be more than about 20% of the Polish market — or of any market. And because you have only a small number of players in most markets, the industry is consolidating across Europe. There have been five transactions so far this year. The median price that has been paid is 6.8 times enterprise value to cash EBITDA. Kruk is currently selling at 5.5 times.

conservatively. The first is Kruk’s record on revaluations. Every quarter they mark their portfolio up or down based on how collections are progressing. Since 2009, they’ve had only one small negative quarterly revaluation, in 2013. And? Kruk has been very conservative with leverage on their balance sheet. Net debt to cash EBITDA is only 1.4 times. They’re not stretched. These guys are just very smart and very entreprenurial. How in the world do you come across a company like Kruk? Well, one of the deep, dark secrets of Chicago is that it’s the best place to run international smallcap money in the United States. We did a little bit of digging and, by our calculations, around $30 billion, or 35%, of all mutual fund non-U.S. small- to mid-cap equities managed in the United States are run from Chicago.

Daikokutenbussan Co. Ltd. (2791.T)

So it’s a takeover target? We’ve asked them if they thought they would be a buyer or a seller. They told us neither. We would just as soon grow with them — and that’s what we intend to do. I think they’ll be one of the winners in the industry consolidation across Europe. The accounting practices of these kinds of companies can get pretty byzantine. I assume you’ve picked over Kruk’s carefully? They’ve been extremely prudent. Two things in particular give us comfort that they’re doing things

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up their balance sheets, although that market varies a bit, country to country.

Okay, tell me about another hidden investment jewel you’ve picked up. Here’s another name that has no research coverage — at least none that I’ve read — out of its home market, which is Japan. Good luck spelling it; it took me forever to learn to pronounce it: Daikokutenbussan. With a name like that, it’s got to be good! Right. But you almost have to go to its headquarters in Kurashiki, a lovely old town in western Okayama Prefecture, Japan, which is situated on the coast of the Inland Sea, to understand this company. So Jon Moog and I went to Kurashiki, and for fun stayed in a traditional Japanese ryokan, with the tatami-matted rooms, thermal baths, paper walls and all the rest of it. I’d recommend it if you’re planning a tourist visit to Japan. That is where Daikokutenbussan is based. What does it do? I found a corporate motto on its half-Japaneselanguage website that doesn’t sound Japanese at all: “Change Yourself. Change the Company. Change Society.” It’s a hard discount food retailer. We met the founder. The good news and the bad news is that he and his family own about 60% of the stock. The market cap is about $400 million. This is about as small a company as we can get into. The float is around $200 million. This company runs 93 supermarkets and when we bought the stock about a year-and-a-half ago, it had 80. It adds about 10 supermarkets a year. Explain what a hard discount food retailer is, please. I take it that it doesn’t sell cheap stale bread — No. It’s a theme we have been playing globally. The two biggest players in the world are Aldi and Lidl, both German companies. They’re not publicly traded,

but their business models have been copied. Aldi owns Trader Joe’s in the U.S. The idea behind a hard discount food retailer is that you reduce the number of your offerings. You don’t carry six different brands of ketchup, each in five different sizes. You reduce your SKUs by about two-thirds, and then you push price discounts. This is no-frills shopping. When we visited a Daikokutenbussan store, the fresh fish section was impeccable and the fresh vegetables were extraordinary. But when you got to packaged goods, the store’s offerings were much more basic. The founder used to be a wholesaler — a lot of the guys who have started these hard discounters began their careers selling food for farmers or sourcing food for full-priced supermarkets — and realized it was being marked up so much that they could compete by offering discounts. So the entrepreneur at Daikokutenbussan sells groceries at a 30% to 50% discount to his rivals. If you doubt this trend is going global, just look at what has happened to Tesco in the U.K. Aldi and Lidl are literally eating Tesco’s lunch. These companies tend not to enter new markets via the largest metro areas, where real estate is too expensive. They start in the provinces and build scale and purchasing capacity until they’re able to lower their gross margins and eventually take on the big guys headto-head. It’s really a classic Clayton Christensen disruptive technology — in the supermarket, of all places. Is this Japanese company profitable? Oh, yes. This company has a stable gross profit margin of about 23%, an EBITDA margin of just under 6%, which — for a grocery retailer — is very good. And the founder — this guy has religion. He is so totally focused on what he does and so totally hands-on. Think Sam Walton. That’s the good news. Okay, tell me the less-good. Like many Japanese companies, this one is grossly overcapitalized. The founder has nearly 20% of the balance sheet in cash. And because his family owns more

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than 50% of the stock, there is a penalty tax. So the company is paying a 48%49% tax rate, instead of Japan’s typical 40%. The upshot is that, using the headline figures, this company is selling around 16 to 17 times earnings. But if you strip out the cash and normalize the tax rate, it’s trading at an adjusted 12.5 times May 2015 earnings. Even with a totally over-capitalized balance sheet, they’re still earning a pre-tax return on equity of 23%. You’re saying it’s cheaper than its groceries? Well, it’s selling at 7.5 times enterprise value to EBIT. It should be selling at 10 times enterprise value to EBIT — without the balance sheet reengineering we think that they should go through. And, of course, since food retailing is a cash business, they have negative working capital. We’ve made about 30% in the stock. But with the store base growing at, call it, 10% to 15% per annum, and with an entrepreneur sweating the details on a day to day basis — and with certainly no balance sheet risk — as long as the margins continue to improve and/or remain good, we think this is a good long-term holding. Really? I love Trader Joe’s for some things, but it’d be awfully constricting to try to shop for everything there. That is a whole different discussion — about how food retailing is going to change. There’s a real conceptual question about what this trend means for all of the big boxes out there. Whether in the U.S. or in the U.K, the food retailing business is bifurcating. On one hand you have the Aldi- and Lidl-types taking market share in the sale of staples and stock-up items. Then you have the Whole Foods of the world, the high-end guys who are selling you lobster — and all the mascarpone cheese that you’ve become addicted to. Then, you probably have some neighborhood convenience stores for when you are in a hurry and price-insensitive. But if you are really price insensitive, you’ll order groceries online, assuming you are in a high-density market like New York or London, which can absorb the distribution costs. What I’m getting at is the much larg-

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What that means is that every company of a certain size — below a certain market capitalization —makes Chicago a mandatory stop anytime they do a U.S. roadshow. So we actually met Kruk’s management when they came into our offices to introduce themselves — and they’ve been here a couple times.

Neither are our kids! That’s what I was alluding to. And it has real implications for all of those big box stores scattered throughout this country. It happens that I have some people in my family who know quite a bit about the real estate markets — Gee, really? And they are thinking that lifestyles are changing. That may be another reason why demand for oil — and gasoline prices — are going down. Worth exploring. But for now, tell me about just one more little value stock you’ve scooped up. First, let me mention that we entered our Daikokutenbussan position in early 2013, a few months before we picked up Kruk. So you’ve enjoyed decent runs in both of them. Patience. It pays off, you mean? From your mouth to — But we think both Daikokutenbussan and Kruk have what I would call large runways ahead of them. Now, let’s talk about a South African furniture retailer, Lewis Group. You do know there’s essentially a skull and crossbones painted across that entire continent — This is a bit of a different kind of name, although surely contrarian, too. This is a true value idea. The other two I’ve mentioned are more GARP-like. We got into it in June 2013. At the time, the miners in South Africa were on strike, the nation’s consumers were over-extended, credit conditions were deteriorating. It was a truly hated market and stock. So when we bought it, the stock was trading at 6 times earnings, 4.5 times EBIT, one times the balance sheet, with an 8% dividend. Now, that’s a value stock. A hold-yournose stock. I’ll say. But what made you take the leap of faith? Well, first of all, they have a 50% payout

ratio — and an Lewis Group Ltd. 8% dividend gives you an idea of what kind of free cash flow this business was throwing off. So we could see that they could actually absorb a certain amount of deterioration. They had a competitor then, by the name of Ellerines, which was in really bad shape — financing sales of furniture at rates that were not sustainable. Well, fastforward: Ellerines went bankrupt. Meanwhile, Lewis Group was in good shape — the poster child in a bad neighborhood. So we ended up buying a company whose largest competitor went bust. How long has Lewis Group been around? This company has existed for over 100 years. It actually was connected to John Lewis, the U.K. retailer on Oxford Street, a long time ago. Much more recently, when their largest competitor went bankrupt, Lewis was able to cherry pick one of its lines and pick up a select number of stores at extremely good prices. And the platinum miners have settled, the strikes have ended, and credit conditions have tightened. So today — Lewis’ market cap is about $665 million — the yield has gone down to 6.6%, and the stock has appreciated from 6 times earnings to 8.8 times March 2015 earnings. Unlike some of their competitors, Lewis’ footprint is more in the small towns, where they’re the only player, than in the large cities. Some 55% of their customers are repeat. This company has been very responsible with their balance sheet. The South African investment community is starting to warm to them. We’re starting to

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(LWSGY.PK)

see research reports come out. They’re going from “sell” to “neutral” recommendations, and they’re starting to raise their earnings estimates. Where do you see it going? This company should sell at 10 to 12 times in a normal environment. They’re selling at well in excess of a 10% free cash flow yield. They’re going to grow their store base a little. The acquisition they made out of the Ellerines bankruptcy will give them a boost over the next two to three years, probably a little bit of multiple expansion. At this point, we’ve made about 28% on our money. Currencyadjusted, probably closer to 20%. So it has been more of a single or double instead of a home run. And the management is absolutely super. The CEO, if I have this right, is only 38 years old. But he’s been with the company for 18 years. Is Lewis really in the business of selling furniture, or is that secondary to its financing operations? Both. They sell about two-thirds of their furniture via installment sales. So there is some commonality between it and Kruk. Both are dealing with lower-income consumers. But I have to tell you, in emerging markets, these are among the best

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er theme, are the suburbs going to depopulate? But we’re not going there now.

They sell what people want — They’re the midwives for a better life. But their investment story is not very complicated. This company is priced extremely well and it has a very, very long history of good management. It pays a very good dividend, thank you. It has a 20% ROE and it is selling at book value; at a single-digit multiple. There aren’t many stocks out there like this at this juncture. How did you find Lewis Group? Remember when I said David is a walking encyclopedia of international small caps? This is simply a quality company that David has known for years, whose stock fell to a truly compelling level. But we’ll most likely look at a name like Lewis for two or three years before we buy it. I should have asked earlier, how do you to define quality in a company? What’s a quality business? One which is cognizant of its cost of capital, demands a compensatory return on capital from its activities, and allocates capital accordingly. So if you take a look at the balance sheet and it is not over-levered and the return on equity is well above average, that’s a good start. Then it’s a question of valuation. I mean, there are a lot of companies out there that have high returns on equity — and high price/earnings ratios. Therefore, not exactly attractively priced — Just do the math. If a stock is selling at book value and returning 20% on equity, then the investor is actually getting a 20% cash-on-cash return on capital. That’s hard to find. But I can give you lots of companies that are returning 20% on equity and selling at 8 times book. If you take that 20% return and divide it by 8, you get to what kind of return you’d get as an investor. I learned that in third

grade. It’s called math. You want a lot more from an investment? Absolutely. I’m asked fairly frequently how we find the names we buy, and the best analogy I’ve come up with is that we’re like a private equity firm with deal flow. If you do what we do — sure we beat the bushes — but people come and find us. We’re known for looking at these kinds of names, which means that the brokerage community calls us. Which means that when companies come through Chicago, they come to see us. Which means that we are creating an institutional database for our firm. As I said, there’s a critical mass of internation small-cap investors in Chicago — thanks to my old firm, Harris Associates, which started it all. When you pair that with O’Hare Airport, you have a perfect recipe, from my perspective, for an opportunistic small-cap investor like Lizard. So you’re not frustrated that most of the industry has tilted decisively toward mega-caps and mega-funds? We are going to do what we do on an evergreen basis. It is part and parcel of who we are. Maybe, I just don’t get it. But I am a specialty retailer, as opposed to a department store. I do what I do; I do it in depth. And I do it —hopefully — better than anyone else. My vision for the firm is to be the best shop out there in our market strategy and in our capitalization niche. I’m just going to keep doing it and keep on getting better and better. As my lovely dear friend, Byron Wien, who has now reached his 80s, reminds me: “Keep putting yourself at risk. There is no other option.” Thanks, Leah. Best of luck with that in the New Year! And to all WOWS clients, best wishes for happy holidays and a healthy and prosperous 2015!

WellingonWallSt. interviewee disclosure. Leah Joy Zell, widely considered a pioneer in international small cap investing, is the General Partner and Lead Portfolio Manager of Lizard Investors LLC, an alternative asset management firm that she founded in 2008, when her non-compete in connection with Columbia Asset Management’s purchase of her prior firm, Wanger Asset Management, expired. Based in Chicago, Lizard serves as the adviser to a fundamental value-oriented hedge fund that takes a unique approach to actively investing in equities outside the U.S. Prior to establishing Lizard Investors, Leah had been a Co-Founder and Partner at Wanger Asset Management from 1992 to 2005. At Wanger, Leah was the Head of the International Equities Team. Lead Portfolio Manager of the top-performing Acorn International Fund. and Portfolio Manager of the Wanger European Smaller Companies Fund. From 1984 to 1992, Leah had worked as a Global Equity Analyst for Harris Associates. She began her career in finance at Lehman Brothers in 1979, after completing her Ph.D. in Modern Social and Economic History at Harvard, where she won Woodrow Wilson, Fulbright (DAAD) and Krupp Foundation fellowships and wrote a dissertation on the post-war recovery of Germany’s heavy industry. Leah earned her Chartered Financial Analyst (CFA®) designation in 1987. This interview was initiated by Welling on Wall St. and contains the current opinions of the interviewee but not necessarily those of Lizard Investors LLC. Such opinions are subject to change at any time without notice. This interview and all information and opinions discussed herein is being distributed for informational purposes only and should not be considered as investment advice or as a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. In addition, forecasts, estimates and certain information contained herein are based upon proprietary research and should never be interpreted as investment advice, as gospel, or as infallible. This interview in no way, shape or form constitutes an offer to sell or a solicitation for the purchase or sale of any financial instrument. Past performance, it should go without saying, is no guarantee of future results. This interviewy does not constitute an offer to sell any securities or the solicitation of an offer to purchase any securities of any sort. Such offer may only be made by means of an Offering Memorandum, which would contain, among other things, a description of the applicable risks. The price or value of investments may rise or fall. There are no guarantees in investment or in research, as in life. No part of this copyrighted interview may be reproduced in any form, without express written permission of Welling on Wall St. and Kathryn M. Welling. © 2014 Welling on Wall St. LLC

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businesses, because that’s where the population growth is. These companies are in the path of aspirational populations. Lewis also sells appliances and electronics. It’s the modern-day version, in an emerging market, of a general store. Just no food.