Tom O'Halloran's favorite small-cap stocks

Tom O’Halloran is a partner and director of Small Cap Growth Investments at Lord Abbett. He is responsible for managing the firm’s small-cap and micro-cap growth products, overseeing the investment teams, and directing the investment strategies.

O’Halloran has been in the investment business for 20 years. Prior to joining Lord Abbett, O’Halloran was an executive director and senior research analyst at Dillon Read/UBS Warburg from 1988 to 2001. Before beginning his career in the financial services industry, he was a trial lawyer from 1980 to 1986. O’Halloran earned an MBA from Columbia University, a JD from Boston College and an AB from Bowdoin College. He also is a holder of the Chartered Financial Analyst designation.

What qualities do you look for in a small-cap stock? Have your criterion changed given the current macro environment?

“There are 3,000 stocks that we look at that we could own. We try to screen out 80% of those through growth hurdles and size parameters in terms of market cap, and financial strength in terms of debt-to-asset ratios. Then we look at the 600 or so, or 20%, of the names. The first inquiry is a two step process after that. First we identify the best businesses then we pick stocks based purely on their growth, not on takeover potential, turnaround potential or valuations. Organic growth is the best kind of growth, but if there’s a strategy of acquisitions that is multi year and sensible to supplement their organic growth, then that’s fine. We require 12% minimum top-line growth, and we want earnings to be growing at least as fast. Our portfolio on average is growing closer to 25%. 

“In terms of what represents a good business, we’re looking at four things: the first two at the microeconomic level, or inside the doors of the company, and three and four are considering the environment in which they function.

1) “When we saw Morningstar at $750 million on the IPO, we said, ‘This is like Moody’s. Moody’s is $20 billion. This is a jewel of a business.”  We saw Mercadolibre, Inc. (Nasdaq:MELI) at $1 billion and we said, “This is the eBay of South America. This is a great business.’  

2) “Is it a good business? Does it have a strong management team? Is the management competent and credible? It’s very important at the small-cap level to have good management. [In terms of] competency, we look at Mickey Drexler at J. Crew. He worked magic at The Gap. He redefined casual clothing in America. He’s a genius of a retailing executive and an example of a highly competent . . .

For access to the full article, you must be a registered member - it's FREE.

Already a member? Please log in below