Dive into small cap growth investing with Portfolio Manager Bryan Wong in his recent interview on “Money Life with Chuck Jaffe.” Hear his insights on our investment approach and some current names in the Osterweis Emerging Opportunity Fund.


Chuck Jaffe: Bryan Wong, Co-Portfolio Manager for Osterweis Emerging Opportunity is here. We're talking small cap investing. This is the Market Call.

Welcome to the Money Life Market Call, the part of the show where we talk with experienced money managers about how they do their job, what they look for that determines their buys and sells, what they see happening on the market broadly, and how they put it all together. Making his debut on the Market Call today, Bryan Wong. He is Co-Portfolio Manager for Osterweis Emerging Opportunity. Ticker symbol on that, OSTGX. If you want to learn more about the firm and the fund, osterweis.com, just like it sounds, but linked up at the Money Life Show recent and upcoming guests page.

Bryan Wong, thanks for joining me on Money Life.

Bryan Wong: Great to be here, Chuck.

Chuck Jaffe: We always start with methodology, particularly important when we have a guest who hasn't been here before. Osterweis Emerging Opportunity, a small cap fund. That only tells us about cap size, it doesn't tell us anything about what it is that goes into your buys and sells, what parts of the market you like and the rest. Let's start with methodology, then we'll understand what you do better.

Bryan Wong: Sure, Chuck. Well, we're bottoms-up fundamental investors. We look for exceptional small cap growth companies, ideally which can graduate to mid or even large cap companies. These are great companies with strong competitive advantage, that can compound both revenue and profits at a high rate over multiple years. As a result, our median portfolio company tends to have much stronger growth as well as profits, compared to our benchmark, which is the Russell 2000 Growth Index.

Not only do we look at secular growth categories, we love secular growth. But frequently there's a strong innovation component to what we do, where our companies can increase their penetration and their market share. What you end up getting is two levels of growth, both secular market growth, as well as increasing penetration and market share, as well as ideally, rising margins.

Chuck Jaffe: When you look at today's conditions, where we have seen the Magnificent Seven driving so much of the market, and small caps haven't been completely left behind, but it's not been the place where the market's been focusing a lot of attention, and it hasn't been a place where there's been a lot of growth. Is it easier or harder right now for you to find the kinds of companies that you're attracted to?

Bryan Wong: We think it's easier. The Magnificent Seven are certainly magnificent companies. Now they have increased to levels of concentration, obviously, of the S&P 500 that are really unprecedented. I think they're about 30% of the index right now, or even higher. In the past, that hasn't ended well. If you think of the Nifty 50 or the Dot Com era, where levels of concentration rose to those levels. We think it makes sense for investors to consider diversifying. We think small caps are particularly attractive right now, due to that undervaluation you referenced. I think over the past 10 years, small caps have delivered something like a 6% return, while large caps have delivered a 14% return, annualized. That's quite a gap. And then, we think there's growth potential as well.

Small cap growth investors, in many ways, we're trying to identify the Magnificent Eight, Nine and 10, as you think about diversifying beyond that concentrated index.

Chuck Jaffe: As you are looking at this, obviously as a bottoms up manager, you're not driven by oh, what's happening, big picture. But are you finding that certain industries have more growth potential for you so that's where you're gravitating?

Bryan Wong: Yeah. We certainly feel like we have an expertise, being in San Francisco, particularly with emerging industries and companies in the technology and healthcare space. That's not to say that all we do is technology and healthcare investing, we do run a very diversified portfolio. We're finding opportunities across the spectrum, including consumer. But we do think one of our key differentiators is our location advantage in San Francisco.

Second, I would say, our team experience in single strategy focus. All we do is small cap growth investing and it's really about the team, my colleagues, Jim, Jamie, and Matt. Then, in terms of how we do it, we apply an absolute valuation discipline. Finally, we have a best ideas concentrated portfolio, with 30 to 40 names.

In some ways, you end up with a concentrated portfolio of growth and innovation, but also tethered to reality and valuations. That's really what we believe is our secret sauce and leads to long term outperformance.

Chuck Jaffe: You talked about, in an ideal world, you'd get those small cap companies and they grow. How much do you let them run? How big will you let something get, when you've got a small cap fund? And what's the sell discipline, in terms of we now know what you like, but at what point do you stop liking it? Is it about the company itself or is it about there's something better to put in there that's not in the portfolio?

Bryan Wong: Yeah, there's a balance to all of this. I think you want to, in some ways, ride your winners as long as possible. We all know there's a small percentage of the universe that are truly exceptional companies. It's amazing that, 10 years ago, Nvidia was a small cap company and now it's a $1 trillion plus market cap. There is a component to that. At the same time, we do want to stay disciplined in terms of our small cap focus, so there is a balance to that.

In terms of sell discipline, I can give one example of a recent company we sold, which is Bentley. It's a software company that is a fantastic company that deals with infrastructure software. If you think about the construction, mainly of public works, that's about two-thirds of their business. Think roads, bridges, and tunnels, they're really digitizing the construction of that space. This is a company that came public in 2020, which was a very weak class of IPOs, if you think about the era of free money. But unlike many companies that came public during this era, it's a company that has been around for over 30 years and it had over 30% operating margins. Extremely high quality, extremely profitable. If you ever meet the Bentley brothers, which run the company, they're a great group of brothers and this is their life's work.

We bought this in 2022, during the market correction. We felt like this is an example of a really high quality company that got sold with much less quality companies. We liked its dominant position and its economically resilient business model, again due to that focus on public works. Now we recently sold it at the end of the year, as the valuation had expanded. We loved the business but just didn't feel like it had sufficient upside to continue holding.

Chuck Jaffe: Again, Bentley Systems, BSY. Now we understand the sell discipline. We're doing it in a different order than we often do, we need to know what's an exemplar or two for the buy side of things. What's a stock that fits the Osterweis Emerging Opportunity's methodology as the kind of thing you particularly like right now?

Bryan Wong: Yeah, I can give a couple examples. One is DoubleVerify. That is a digital advertising company, it really serves as a seatbelt for digital advertisers. Think of it a bit like cybersecurity. It's been publicly reported that IBM suspend its ads on X, formerly known as Twitter, after its ad appeared next to some content promoting Hitler. That's the exact type of content that DV really seeks to prevent. It's a very sticky business. Its average tenure of its top 75 customers is over seven years. Think of brands like Marriott, Apple, Home Depot.

What we like about is not only does it participate in the growth of digital advertising, X Search, this is probably a $300 billion market growing somewhere around 12%, but it also can increase its penetration and thereby grow faster than the industry. Social is a big driver of its revenue right now. Think about short form video, think about TikTok, think about YouTube, think about Facebook Reels. Social is about 15% of its revenue, compared to 60% of digital advertising spend, so there's multiples of this to increase.

Then specifically, we like its expansion opportunity right now with Meta. Historically, advertisers have had a tense relationship with Meta. If you go back to the Cambridge Analytica scandal, Meta hasn't always wanted to let folks come in and grade their homework, so to speak. As a result of that, over half of DoubleVerify's top 100 advertisers use DoubleVerify on Meta, but half do not. If you compare that to YouTube, the statistic is 95%. That's now changing, as Meta's actually embracing a little bit more third party verification, and DoubleVerify's poised to expand with Meta. Again, you get the growth of digital advertising, but you get a kicker on top of that in terms of the increase in penetration.

Chuck Jaffe: I got to ask, very quickly, because this doesn't happen much. But DoubleVerify has just been in the news, because on Wednesday and Thursday, there was some guidance that the market didn't like and the stock got hammered. When you've got a stock that you like for all the reasons, you said nothing about stock price or anything else, more attractive to you now that it's been beating down because you like values, or concerning that it got beaten down because the guidance that moved the market concerns you?

Bryan Wong: Yes, we do think that the reasons for the guide down are short term in nature. There is a bit of a slowing in terms of ad growth, but we think it's fairly short term in nature. Again, that long term thesis is intact. They're outgrowing their main competitor, IAS, by 2X, if you look at the guide for the first quarter revenue. We think this is a more attractive value opportunity with a very strong long-term thesis.

Chuck Jaffe: DoubleVerify, DV. We got time for one more. What's something else that stands out to you now?

Bryan Wong: Yeah. On a completely different note, we like e.l.f., which is a value cosmetics brand. You think about the average price point in the $6 to $7 range. This is a company that was founded to sell cosmetics for $1 over the Internet, with a vision to create a different kind of beauty company around accessibility. Think about premium quality but accessible price points.

One of the tenets of the accessibility is the fact that actually every employee is granted equity at the company, which is rare. As a result, you find that the sales and profits for employees are actually three to five times more productive than its peers. It's an extremely innovative company. If you think about that flywheel of happy, incented employees, innovation in terms of product velocity, with each new product with a higher gross margin and strong payback on ROI, the majority of the marketing spend is digitally oriented and e.l.f. is the number one cosmetics mass ecommerce site. If you think about the growth metric here, there's probably less secular growth in cosmetics, but there's a strong market share opportunity to gain here for e.l.f.

They've more than doubled their market share over the past five years. We think the market share can double from 9% to 20%, using e.l.f.'s current market share and target as a north star. Walmart and the drug channels are really looking to increase their allocation to e.l.f. over time. In addition, we think international is a fantastic growth opportunity and the company's moving up-market in terms of its brand as well, with the Naturium acquisition. We think this has future potential to be a L'Oreal, so to speak.

Chuck Jaffe: That is e.l.f. Beauty, ticker ELF, E-L-F. In the news last week, because at marketwatch.com, they were doing a story that was comparing it to Nvidia, in terms of how the company had done over the last five years. Interesting stuff.

Now it's time for us to get your quick and dirty take on some stocks my audience is particularly interested in.

Well, it's the most exciting part of the interview for a lot of you, it's Quick and Dirty. Our lightning round with Bryan Wong, Co-Portfolio Manager at Osterweis Emerging Opportunity, OSTGX, the ticker. Small cap stocks. Learn more about what the fund does and what the firm does at osterweis.com.

We're going to jump straight in, starting with a request today from Richard, in Chula Vista, California. He wants to know about Inspire Medical Systems, it's ticker, INSP.

Bryan Wong: Inspire is a medical device company that sells an implantable device for sleep apnea. My brother-in-law actually has this condition. It arises as a result of a blocked or partially blocked airway. The current standard of care is C-PAP, there are about two million prescriptions in the U.S. It's a very bulky device that you have to wear at night, so there's very low patient compliance.

Now Inspire's really changing the game, in terms of having a 90-minute, minimally invasive procedure. We think the company can go from around 1,000 accounts currently to over 2,000, with two procedures plus per center, per month. We think this company has a potential to do $1.5 billion in revenues with inflecting profitability. It's got very high gross margins and very effective consumer advertising. We do own this company.

Chuck Jaffe: Yeah, Inspire Medical Systems, part of the Osterweis Emerging Opportunity portfolio. That would be a buy.

Next, for Tony, in Henderson, Nevada. Natera Incorporated, NTRA.

Bryan Wong: Natera is another healthcare company. This is a DNA testing company. They started in genomic testing for NIPT, that's non-invasive prenatal testing to detect Down's syndrome and inherited diseases. I remember when I had my first son being presented this option, so it is something that's very prevalent.

The interesting opportunity now is actually they're the leader in MRD, which is cancer monitoring, as well. It's a much larger market, that's about a $20 to $30 billion market, versus $2 to $3 billion for NIPT. We think they can do over $1 billion in revenues in this cancer monitoring market, as well as the $1 billion in the NIPT market. We think coverage is expanding as well. We own this company as well.

Chuck Jaffe: Again, owned by Osterweis Emerging Opportunity, Natera Inc, NTRA. We would call that a buy here on Money Life.

Chuck Jaffe: Next, for Dave, in Jacksonville, Florida. Tyler Technologies, TYL.

Bryan Wong: Tyler is a software company in the public sector. We like the space. We own Axon Enterprises, which also sells to government customers. I would say the similarities are both sell-to-government customers. Again, we like that resilient customer base. They both benefit from the move to cloud-based software solutions and they're less affected by the macro environment.

The difference is Tyler is growing around 6%, I think, organically, while as Axon's growing in the mid to high 20% range. We just like the stronger growth profile at Axon.

Chuck Jaffe: That, for us here on Money Life, is an interesting one to describe because you didn't say anything bad about Tyler. It sounds like good company, not great stock. I don't know how I want to classify that one. But what we know is that the one you're more interested in is Axon Enterprise, ticker symbol AXON.

Chuck Jaffe: Sam, in Waterfleet, New York wants to know about Monster Beverage, MNST.

Bryan Wong: Monster is an energy drink company. Actually, over a long period, it's been one of the most successful stocks, I think, of all time. It's a large company. It's something we couldn't own as small cap investors, but it's benefiting from this trend of energy drinks, which is also driving the growth of a company we do own, Celsius, which is the smaller cap version of Monster.

Energy drinks now have a larger share, amazingly, than soft drinks in the convenience store channel. Folks have really moved away from soft drink consumption and moved towards energy drinks. Again, similar to Axon, I think Monster is growing around 12%. Celsius just reported its quarter recently and I think put up 95% growth. Again, as small cap investors, we tend to focus on the growth potential of these companies but we like the energy drink channel in general.

Chuck Jaffe: Liking the energy channel, I'm going to make it very clear here. That's a non-recommendation on Monster Beverage, not a buy, sell, or hold because they don't own it and they can't own it, because it's not a small cap and their focus is on small caps. But in the space, the one they own and like is Celsius Holdings, that's CELH.

Chuck Jaffe: Yeah, all the power, all the energy. That's what you're looking at.

Last, for John, in Seattle, it's Tandem Diabetes Care, TNDM.

Bryan Wong: Tandem is a medical device manufacturer for diabetes. It is a name we've owned in the past. I would say currently, Tandem's going through a bit of a transition. It's losing share right now in the market. They have a different business model that focuses less on the leading technology in the space, which is patch pump technology. We're probably a little bit more neutral here, in terms of liking the overall space, but having some different market share dynamics going on.

Chuck Jaffe: Neutral, not really particularly good or exciting, or bad. But right there, in the middle, unexciting with Tandem Diabetes Care, TNDM.

Chuck Jaffe: Yeah. But that part might not have been exciting, what was great was hearing about small cap stocks from Bryan Wong. Bryan, I appreciate the help and the time, thanks for joining me on the show. Let's do this again down the line.

Bryan Wong: Sounds good. Thanks, Chuck Jaffe.

Chuck Jaffe: That's Bryan Wong. He's Co-Portfolio Manager at Osterweis Emerging Opportunity. OSTGX, the ticker symbol. Learn more at osterweis.com.

We'll be back to wrap up today's show and let you know what's coming for the rest of the week. Oh my goodness, what a great lineup, I will tell you all about it when we wrap things up right after this message.


Bryan Wong, CFA

Vice President & Portfolio Manager - Small Cap Growth

Bryan Wong, CFA

Vice President & Portfolio Manager - Small Cap Growth

Prior to joining Osterweis Capital Management in 2014, Bryan Wong was a member of the investment team managing the endowment of the David and Lucile Packard Foundation. Before that, Mr. Wong was an Analyst at Wohl Capital Management, a long/short hedge fund.

He is an equity owner in and a principal of the firm and a Portfolio Manager for the small cap growth strategy.

Mr. Wong serves on the investment committee of the Asian Pacific Fund.

Mr. Wong graduated from Yale University (B.A. in Political Science and International Studies with distinction) and the University of California Berkeley, Haas School of Business (M.B.A., Investment Management Fellow). He holds the CFA designation and is a member of the CFA Society of San Francisco.

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Opportunity Fund Quarter-End Performance (as of 6/30/24)

Fund 1 MO QTD YTD 1 YR 3 YR 5 YR 7 YR 10 YR INCEP
OSTGX 0.86% 2.76% 15.19% 19.04% -2.70% 12.22% 15.05% 13.21% 14.59%
Russell 2000 Growth Index -0.17 -2.92 4.44 9.14 -4.86 6.17 7.28 7.39 9.79
Swipe Table for Full Data

Gross/Net expense ratio as of 3/31/24:1.20% / 1.12%. The Adviser has contractually agreed to waive certain fees through June 30, 2025. The net expense ratio is applicable to investors.

Performance data quoted represent past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance of the Fund may be higher or lower than the performance quoted. Performance data current to the most recent month end may be obtained by calling shareholder services toll free at (866) 236-0050. Performance prior to December 1, 2016 is that of another investment vehicle (the “Predecessor Fund”) before the commencement of the Fund’s operations. The Predecessor Fund was converted into the Fund on November 30, 2016. The Predecessor Fund’s performance shown includes the deduction of the Predecessor Fund’s actual operating expenses. In addition, the Predecessor Fund’s performance shown has been recalculated using the management fee that applies to the Fund, which has the effect of reducing the Predecessor Fund’s performance. The Predecessor Fund was not a registered mutual fund and so was not subject to the same operating expenses or investment and tax restrictions as the Fund. If it had been, the Predecessor Fund’s performance may have been lower.

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As of 12/31/2023, the Osterweis Emerging Opportunity Fund did not own Nvidia, Bentley Systems, IBM, X, TikTok, YouTube, Meta, Integral Ad Science Holding Corp, L’Oreal, Tyler Technologies, Monster Beverage, or Tandem Diabetes Care.

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Compound is the repeated addition of interest payments to the principal invested over a period of time.

Magnificent Seven stocks are a group of high-performing and influential companies in the U.S. stock market: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla.

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Osterweis Capital Management is the adviser to the Osterweis Funds, which are distributed by Quasar Distributors, LLC. [OCMI-508479-2024-03-05]