Interview with Mary Lisanti

We are small-cap growth investors, so when I talk about small-cap stocks I am really focusing on small-cap growth stocks. [This year] seems to me to have a lot of similarities to 1990; that was a year where small stocks declined in the first half of the year over concerns regarding the bank crisis and the economy, and then recovered as it became clear that the bank crisis, while difficult, was being handled, and the economy had entered a short (two quarter) and relatively mild recession. I believe, given the recent actions by the Fed and the regulators, that the financial issues that currently confront us today will also turn out to be manageable — by that I mean they will not plunge us into a depression or a severe recession — and while it appears we are in a recession, I believe it will be reasonably short and mild. However, also like the 1990s, the effects of the financial crisis will cause economic growth to be quite mild for many years forward; this will cause the market, I believe, to put a premium on those companies that can deliver earnings growth.

Smaller companies tend to be less liquid as trading vehicles than larger companies and mid-sized companies, as they have fewer shares outstanding. They also can be more volatile over short-time horizons, for the same reason. However, in part because of their smaller size and fewer shares outstanding, they have the potential to grow earnings at a faster rate than larger companies. I would also say that, in my experience, management has a bigger impact, either positive or negative, on . . .

There are over 5,000 companies that meet our definition of small cap (companies under $2 billion in capitalization), thus it is really hard to make generalizations [concerning the corporate earnings outlook]. We are still finding companies that have bright prospects for earnings growth in 2008 and beyond, because they have strong product cycles, really differentiated products, have made an acquisition that is strategically significant, or some other event. I believe that in all but the most severe recessions, the future of a small company rests . . .

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