Mathieu Sirois, CFA, Partner, President and Senior Portfolio Manager, U.S. Small Cap Equities at Van Berkom and Associates
Tempur Sealy International (NYSE:TPX) and DoubleVerify (NYSE:DV) are just two of the top picks from US Small Cap Portfolio Manager Mathieu Sirois.
Mathieu Sirois, CFA, is Partner, President and Senior Portfolio Manager, U.S. Small Cap Equities at Van Berkom and Associates Inc., where he is responsible for all the investment decisions related to this product and for the management of the U.S. Equity Team, and for conducting research on a broad spectrum of the U.S. small-cap equity market.
Mr. Sirois is a member of the Executive Management Committee, a member of the board of directors and a significant shareholder of Van Berkom.
He became President of Van Berkom and Associates Inc. in 2021.
In 2007, he was promoted to the position of Senior Portfolio Manager for Van Berkom U.S. Small-Cap Equities, and prior to that, he was part of the U.S. Small-Cap Equity Team since joining the company in 2000.
Mr. Sirois is a CFA Charterholder (2003) and holds a M.Sc., Finance from HEC Montreal (2001).
His portfolio methodology leads directly to top picks like Tempur Sealy International (NYSE:TPX) and DoubleVerify (NYSE:DV).
“There are many, many examples in the past whether it’s small caps or large caps, where if you overpay for a good business, you may not generate above-average and outsized returns for your investors.
So at Van Berkom, it’s always been very, very important that all the companies that make it into our client portfolios, not only do they have all the quality criteria we’re looking at, but they have to be mispriced, significantly undervalued by the market.
And again, the small cap market being so big, being so opaque in many ways with the information flow, not as consistent as large cap equities, it creates these amazing situations where we can take advantage of big inefficiencies in our market to invest in a great business, but only when it is misunderstood and mispriced and undervalued by investors.
The way we go about this is, for any investment candidate that we strongly consider for our client portfolios, we go through a very deep extensive research process that involves several steps, and we look at all the quality criteria of a business and do research on each of these aspects, and we have to, with a lot of conviction and confidence say, “Yes, this company ticks all the quality boxes that we have.”
However, we also build a full detailed financial model on all of the investment candidates we’re seriously considering for our client portfolios, leveraging our deep knowledge, our superior knowledge, and using such superior deep knowledge for the key assumptions, key inputs of our financial model to project and predict 10 years of estimates, income statement, cash flow statement, balance sheet, through our proprietary research process, coming up with key assumptions on revenue growth, margins, working capital, capital expenditures.
From these estimates, we come to a discounted cash flow valuation methodology where we will estimate with a lot of conviction what the true intrinsic value of a business is.
And recognizing that a DCF — or discounted cash flow — methodology is quite sensitive to the assumptions that we’re using, we will work with various scenarios: a more pessimistic scenario for revenue growth, for margins.
What if the company is not performing quite as well?
A base case scenario which is really what we think is the most likely outcome for the next few years, and then a more optimistic scenario.
And that will give us, these three scenarios, a range of fair values of intrinsic values, and then we compare the current stock price, the current market value with this range of intrinsic values.
And if we see a double or more over the next five years, that’s when we will commit to a new investment in our client portfolio.
So we do a deep dive financial analysis, full discounted cash flow valuation, and then we also work with valuation multiples.
We look at historical valuation multiples in absolute, so relative to itself and also versus peers.
And again, applying historical valuation multiples that range to our five-year-out estimates gives us another measure of where the stock could be five years out.
Again, if we see a double or more over the next five years which is our typical investment horizon, then we will go ahead and commit to the investment.
So yes, we buy the very best businesses, great business model, great track record, fantastic management team, but we also want to buy these great companies in our client portfolios only when they’re undervalued, and that’s why we spend a lot of time assessing the true valuation of any business that we’re considering for our client portfolios.”
This methodology identifies companies like Tempur Sealy International (NYSE:TPX) and DoubleVerify (NYSE:DV).
“…There is no question that developing a better mousetrap, as they say, is one of the key advantages or investment merits of small cap companies.
Oftentimes, they create a better service offering, a better product, and then the smart management teams will build a strong moat around that offering such that it’ll become difficult for new entrants and existing competitors to try to replicate the offering, whether it’s a product or a service.
So innovation can play a role in all kinds of areas.
I’ll give you a few examples.
Tempur Sealy International (NYSE:TPX), the largest manufacturer and marketer of mattresses and bed products in the world — they in many ways develop products through innovation R&D that have become best-in-class and the most preferred sleep options from consumers, and therefore today, slowly but surely over the last two decades-plus, they’ve gradually gained shares to become the largest company.
A lot of it happened organically.
They’ve also acquired some competitors such that today, they have the best brands in the industry, highly sought after by consumers.
They have the best manufacturing, they have the best distribution, they have the best footprint at retailers, and they can outspend everybody else on brand-building, on advertising.
They can outspend everybody else in the industry on R&D.
So they’ll continue to innovate and outpace the industry and come up with products that resonate really well with consumers while also building their brand like nobody else is capable of doing it in the industry.
That’s an example of a company that has, through innovation in terms of marketing, in terms of manufacturing, in terms of R&D, has developed products that have been highly sought after, that have been synonymous with quality.
They’ve been able to gain share, and now it’s very difficult for the competition to catch up.”
“Then we have a company like DoubleVerify (NYSE:DV), they develop very sophisticated algorithms through a huge base database to help companies measure the efficacy and the effectiveness and efficiency of their online advertising.
So they help companies measure the efficacy, the productivity, the ROI on their digital advertising while also helping them prevent fraud on their brands, on their products.
So they’re detecting fraud, they’re helping companies measure the effectiveness of advertising.
They have the best data in the industry that they’ve been able to put together.
And now, through AI and machine learning, they’re coming up with very sophisticated algorithms.
So they work with most big advertisers, most advertising platforms, and they’ve steadily gained market shares within that market.
As the market has shifted more and more toward digital advertising from traditional, they’ve been able to benefit from that as a secular growth trend while continuing to innovate with additional products and functionalities such that this is a company that has maintained a very strong growth profile, very high returns, high margins.
So that’s another example of what innovation can do, especially in the small cap landscape.
I can go on and on.
We’ve got many such portfolio companies that have definitely benefited through innovation.
They’ve been able to build a great business model, and then gain market share as they’ve been able to sell these solutions, product and/or service to customers offering them a better mousetrap, better ROI, better value proposition, and then creating ingredients for a strong moat around this business such that they can sustain that outperformance, that faster growth and these market share gains.”
Get all the top picks beyond Tempur Sealy International (NYSE:TPX) and DoubleVerify (NYSE:DV) by reading the entire interview with Mathieu Sirois, CFA, Partner, President and Senior Portfolio Manager, U.S. Small Cap Equities at Van Berkom and Associates, exclusively in the Wall Street Transcript.
