Gerlach on Growth: Finding Great Companies
09/28/2016 10:00 am EST
Doug Gerlach is president and editor-in-chief of ICLUBcentral — and its flagship Investor Advisory Service subscription newsletter. Here, he discusses his long-term fundamental strategy, an undervalued New York-based banking outfit and the benefits of small and mid-cap stocks.
Steve Halpern: Joining us today is Doug Gerlach, president and editor of ICLUBcentral's subscription newsletters. How are you doing today, Doug?
Doug Gerlach: Terrific, Steven. Thanks for having me.
Steve Halpern: Now I'm not sure if I'm pronouncing this right, but is it ICLUB?
Doug Gerlach: That's right, ICLUBentral is the name of our company. We are about 16 or 17 years old, and in 2009 we merged with the non-profit investor education group Better Investing, so we've been operating since that time as a four process subsidiary.
As the name implies, ICLUBentral started out making tools for investment clubs. We also make software for individual investors, and we publish newsletters. We have a full tool set focused on the retail, individual investor market.
Investment clubs are a big focus of our business. I actually wrote Investment Clubs for Dummies in 2001, but we also focus on making the tools that investment club members use, both in their club portfolios and in their individual personal portfolios.
Steve Halpern: Now, for the seventh consecutive year, your newsletter, Investor Advisory Service, was ranked as one of the nation's top newsletters for consistent long-term performance. Could you tell our listeners a little about this newsletter and your underlying strategy that's led to such consistent gains?
Doug Gerlach: The Investor Advisory Service newsletter was actually started in 1973, so it's got a long, long history of delivering research for its subscribers. Our focus is on the long term. We are fundamental investors.
We seek total return, primarily through capital appreciation that comes from investing in growth stock. We like to buy great companies with terrific management teams, and buy them when they're attractively priced.
The volatility of the overall market provides plenty of opportunities to invest in these very good companies when they are at attractive prices.
Our strategy is independent of the bull and bear market cycle. It's independent of the economic cycle. It really is focused on a five-year horizon, looking out into the future, past the end of the next recession, the end of the next bear market, when the stocks and the company performance are going to drive those prices to ever-higher levels.
Steve Halpern: You mentioned total return, so in effect you're looking for both a combination of growth and income for people who follow your service?
Doug Gerlach: We don't focus so much on income. We actually prefer looking for growth, and there's a little bit of a value component. The income part - we are not going to turn away dividends, but we're not focusing on the dividend yield.
We really are looking at the components that make up the total return package that comes from the growth of the company, the underlying growth, and the infallible truth that companies that growth their earnings over time will see their share prices grow and go up in the ever-higher levels, as those companies continue to expand.
We were going to focus on that trend and stick with that, and our long-term perspective allows us to kind of ride above the short-term gyrations of the market and the panics that happen, and the corrections and the bull and bear market cycle, allow it to focus on that long-term performance, which really will deliver a measure of appropriate return, relative to the risk that you take on when you invest in the stock market.
Steve Halpern: At the upcoming Dallas MoneyShow in October, you're going to be conducting a special workshop, focused more on small- and mid-cap stocks. What makes this part of the market attractive in the current environment.
Doug Gerlach: Well, because we are growth investors, it turns out that most of the companies that we follow end up being small- and mid-sized companies, simply because they're growing faster than large-cap stocks or mega-cap stocks.
While we do have a mix of companies of all sizes that we track — we're currently tracking about 75 stocks in the Investor Advisory Service Newsletter — we tend to focus on where the growth opportunities are, so that drives us into the small- and mid-sized stock market.
The problem with that market for individual investors is, because those companies are often less followed by the big names on television, the major newsletters and the large mutual funds, it's harder to find research and information on them.
So we really get to fill a particular need that most investors have, which is trying to increase the exposure on the smaller end of the company scale, without taking on undue risk or overloading on companies that don't have proven track records. We really like focusing on those smaller and mid-sized companies as a way of generating maximum total return for an investor's portfolio.
Steve Halpern: Could you possible share a couple of names of small- and mid-cap stocks that you're looking at, to give our listeners a better idea of the types of stocks that you're recommending?
Doug Gerlach: Sure. Some of these companies are probably names that aren't as familiar to many investors, because of the size of the company. For instance, one of the companies we follow, and that we are recently very interested in, is one of the fifty largest banks in the United States.
It started only is 2001, however, and has only 30 banking offices, primarily in the New York City area. That company is called Signature Bank (SBNY).
The stock price is down, currently. It's about $115. It's near its 52 week low, and it's an interesting reason for that decline. It has a lot to do with the company's exposure to the taxi medallion market in New York and Chicago.
As many people are away, the taxi business in those two cities has been hurt pretty badly recently by the Uber and Lift, the ride-sharing services. Concerns about the loans that Signature Bank has made in those areas, as the value to the taxi medallion just drops down, it's causing some investors to feel a little panic, and we think that's creating a buying opportunity.
The write-down rate on those loans has really gone up ever so slightly, and it's a fraction of Signature Bank's total portfolio. The bank focuses on high net worth individuals, both personal and business banking for that clientele. Again, it fits into a niche market.
Total revenue is about $1.2 billion, so it kind of fits nicely into our growth expectation. We see the chance of 15% growth of earning over the next five years, and that would deliver a pretty good rate of return based on the undervalued price of about $115, where it sits right now.
Steve Halpern: Now, I was going to point out at the Dallas MoneyShow, you'll also be offering a workshop called "Surviving the Next Bear Market or Recession". Can you give a preview of what types of things you'll be covering there?
Doug Gerlach: There's an old German proverb that, roughly translated, says that the wolf is always bigger in the imagination, and that's my take on investing in bull and bear markets. The media makes out recessions in bear markets as a terrible, catastrophic event, that investors need to take action to protect their portfolio.
And then, when we experience bear markets and experience recession, often they're over before we really realize it. Investors who try to time the market by moving assets around in preparation for what they perceive is a coming bear or coming recession often get punished. You end up on the wrong end of selling when the market is low and buying when the market is high.
I take a look at the history of the bear markets and bull market cycle in the US, and take a look at the recessions and the history of how long it takes to recover from recession. When you have that perspective and that historical experience that helps you understand those markets.
Then you can react more accordingly and not fall into the panic trap that so many individual investors fall into, driven by the media frenzy and the headlines and the talking heads on TV that are urging you to do something, when perhaps staying the course is the most prudent course of action that investors can take during the bear markets and recessions.
Steve Halpern: Again, our guest is Doug Gerlach of ICLUBcentral. Thank you so much for your time today. It was fascinating to hear your thoughts.
Doug Gerlach: Thank you, Steven.
Editor’s Note: Doug Gerlach will be a featured speaker at the upcoming MoneyShow Dallas, October 19th through 21. Register for free here.
By Doug Gerlach, Editor-in-Chief at the Investor Advisory Service