Anthony Weber is back in the saddle again. After two brutal years, the manager of the A-rated ABN AMRO/Veredus Aggressive Growth Fund is once again beating the market and his peers in the small-cap growth fund category. A Kentuckian, the 44-year-old is a horse fanatic, so he named the fund Veredus, Latin for "swift horse," to reflect his rapid-fire trading style. But Weber isn't gambling with investors' assets. His $435 million fund has delivered an 11.6% five-year annualized return, compared with -1.6% for the Standard & Poor's 500-stock index and 0.8% for the average small-cap growth fund. Personal Finance Editor Lewis Braham recently spoke with Weber.
Q: How would you describe the fund's investment strategy?
A: We feel what drives stock price movements, especially for small-cap growth stocks, are earnings surprises and subsequent analyst estimate revisions. We screen for stocks that are meeting or exceeding analysts' earnings expectations for at least two quarters in a row and then look for those that have had the greatest upward estimate revisions. If our investment team believes the stock will continue to exceed expectations, we buy it. Once the Street's analysts catch up to our estimates, we sell.
Q: What have you been buying lately?
A: Home builders and energy stocks. One of our builders, Ryland Homes (RYL), has beaten the Street's expectations for 26 consecutive quarters. The builders have several things going for them. First, there's a large market for new homes and huge barriers for competitors to break into the industry. There's no foreign competition. There's no technology to supplant a builder. And the demographics are phenomenal. We've had a tremendous influx of immigrants. That is driving first-time home buying.
In the energy sector, we like gas and oil exploration companies Patterson-UTI Energy (PTEN), Pride International (PDE) and Ultra Petroleum (UPL) I think we are in the midst of a potential energy crisis. Right now, U.S. gas reserves stand at a full 25% below last year's levels. Meanwhile, industrial energy demand is down 50% from last year. What happens when that demand comes back? We may have an energy shock like we did in the 1970s.
Q: What about technology?
A: In the 1990s with tech stocks, all boats rose. That's not going to be the case this decade. We've got 15% to 16% tech right now, and there's no real theme. It's very stock-specific.
Q: How do you control risk?
A: An initial position in a company is typically only 1% or 2% of the portfolio, and we don't let it grow beyond 5%. We use a lot of technical analysis -- relative strength, volume, money flows -- to give us signals as to when to sell. If a company has no good reason to miss an earnings estimate, it's out. There are far more losers in small-cap stocks than in large. That's why the portfolio's turnover ratio is 150% to 200%. We trade to avoid land mines.