Small-cap equity fund seeks the next Netflix

The small cap universe can be opaque, filled with companies with short track records and low earnings.

But that darkness is what Jim Callinan loves about it. He scavenges to find what he calls “mystery” companies, high-quality companies that are doing something unique in their industry but are misunderstood by most investors. After 27 years in the small business world, the $208 million senior portfolio manager

Emerging Opportunity Osterweis

fund (ticker: OSTGX) knows how to be a dogged detective.

Fiver International

(FVRR), an online marketplace for independent services, was one such mystery. San Francisco-based Callinan first bought the stock in late 2019, believing the company was undervalued. While investors had long understood e-commerce, purchasing services such as website design or logo design online was relatively new. Fiverr wanted to make the process as easy as buying physical goods online. The business model was already profitable, and Callinan believed Fiverr would receive tailwinds from the pandemic.

“Fiverr’s solutions have been key in helping many small businesses improve their online presence as physical stores have been impacted during Covid,” he says.

At the end of 2019, the company had 2.4 million buyers, and in its initial estimate Callinan expected Fiverr to have five million buyers by 2025, based in part on management’s plan. aimed at increasing the number of active buyers. In the third quarter of 2021, this figure had already increased to 4.1 million buyers.

Stock picks like this have helped make Emerging Opportunity a Morningstar-rated five-star and bronze medal-winning fund. It easily beat its low-growth peers and the Russell 2000 Growth Index over three and five years. Its five-year annualized return of 21% places it in the top 6% of its category, all with an expense ratio of 1.11%.

Callinan, 61, began his career at Putnam in 1987 as an equity analyst, before managing the Platinum LTC Emerging Growth fund. He left the firm in 1996 to co-found RS Growth Group, and Morningstar named him its National Equity Manager of the Year in 1999. He joined Osterweis in 2016. There he founded the fund Emerging Opportunity, based on a small cap strategy he created at RS Growth.

When scouting for potential holdings, Callinan, along with Emerging Opportunity co-managers Matthew Unger and Bryan Wong, look for a few key characteristics: a company trying to dominate with disruptive technology or a business model that allows it to grow very quickly, and rising margins since its IPO. He is also looking for a strong management team that sets “ambitious goals”, ambitious but achievable targets.

Full return
1 year 3 years 5 years
OSTGX -12.9% 21.8% 21.0%
Russell 2000 Growth -15.1 11.3 10.9
top 10 holdings
Company / Symbol % of portfolio
Towards innovation / ONTO 6.0%
MaxLinear / MXL 5.0
Soils & Decoration Holdings / FND 5.0
Marriott Vacations Worldwide / VAC 4.8
Macom Technology Solutions Holdings / MTSI 4.6
Digital Kornit / KRNT 4.6
Rapid7 / SPR 4.6
Tandem Diabetes Care / TNDM 4.5
FirstService / FSV 4.4
Wing Stop / WING 4.2
TOTAL: 47.8%

Note: Holdings as of December 31. Returns through January 31; three- and five-year returns are annualized.

Sources: Bloomberg; Osterweis Capital Management

Callinan applies a high conviction strategy of around 30-40 names. Most holdings average around 30% annual revenue growth, reflecting a fast-growing business, but typically with an immature margin structure. Callinan balances risk and opportunity by modeling valuations five years ahead, reviewing a company’s progress quarterly to anchor points on his model.

Callinan is thrilled with his March 2021 purchase of now-No. 8 holding

Tandem diabetes care

(TNDM), a leading player in the field of patch-based insulin pumps. It has both strong revenue and earnings growth with strengthening margins. Tandem could benefit after its biggest competitor, the medical device giant


(MDT), received a warning letter from the Food and Drug Administration regarding one of its facilities following the July 2021 recalls that included one of its insulin pumps. Medtronic said it was committed to resolving the issue.

The insulin pump industry has high gross margins and recurring revenue, and devices are increasingly being sold directly to consumers. Tandem Diabetes records annual revenue per patient between $1,700 and $1,800, while customer acquisition costs are between $500 and $600. “A three-to-one sales-to-investment ratio always works.


[NFLX] was like that,” Callinan says.

The fund’s long-term valuation model helps guide progress, and keeping a strict eye on valuation is essential for a high-conviction strategy. To mitigate risk, Callinan will sell part of a position if a company is significantly short of earnings or if management changes stretch goals. He will come out completely if the situation does not improve quickly.

Callinan applies a high conviction strategy of around 30-40 stocks.

Photograph by Cayce Clifford

In 2021, Callinan reduced the fund’s software exposure, locking in profits as valuations soared. He still holds a small position in


(FIVN), a cloud-based call center for businesses to manage customer service. It considerably reduced the staying power after

Focus on video communications

‘ (ZOOM) Five9’s planned acquisition collapsed in September. Callinan is monitoring Five9’s ambitious goal of reaching one million call center agents from the current 250,000, noting he still has great confidence in management.

Emerging Opportunity has a higher allocation than its peers in the consumer cyclical category, at around 25% of the portfolio, according to Morningstar.

Callaway Golf

(ELY) expresses the characteristics that Callinan likes, although it is not a new name. The No. 1 golf club maker’s brand could grow since buying sports entertainment company Topgolf, he says. Callaway management has an ambitious goal of reaching $1 billion in earnings before interest, taxes, depreciation and amortization, or Ebitda, by 2030, and Callinan expects that to happen sooner. Its executives get bonuses if they keep the stock price high and hit their Ebitda target, “so they can’t hit $1 billion for making acquisitions that hurt the stock price.” of action”.

The fund lagged its peers and benchmark in 2021 as more value-oriented companies led the Russell 2000 Growth Index higher – names that, however, fail to meet the requirements of fund growth. And while fears of rising inflation and rising interest rates are hitting small caps as a whole, Callinan remains resolutely focused on quality companies.

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