High ROIC + Niche Market Advantages

A Winning Recipe in Small Cap Core and SMID?

How do our experts seek to capitalize on inefficiencies in the small cap space to identify strong capital allocators that may be largely overlooked? In a short video portfolio manager Jeff Paulis, CFA, discusses his team’s bottom-up approach to investing in companies that have high Return on Invested Capital (ROIC), strong competitive advantages, and operate in niche markets.

[Jeff Paulis] – We think the markets uses metrics like earnings growth and revenue growth and total market opportunities to determine value. We, on the other hand, use Return On Invested Capital, or ROIC, and its by-produce free cash flow, as the ultimate driver of underlying equity value, not revenue or earnings. We believe companies that target high Return On Invested Capital, or improving return on invested capital, combined with a focus on niche market opportunities with strong competitive advantages and that target smaller overall markets, generate superior value over time.

They do this by generating strong free cash flow, reinvesting that cash flow at high rates of return, which produces even more free cash flow which can lead to increasing equity value. So the companies in the Russell 2000® Index that have the highest Return On Invested Capital have historically outperformed the Russell 2000 Index over time and created significantly more value. The same can be said for companies with improving ROIC. Those companies have also significantly outperformed the Russell 2000 Index over time.

We use a disciplined ROIC research process, focused on discovering catalysts for ROIC change that might be overlooked by the Street or our competitors. We spend time understanding market structures as well as the competitive environment and competitive positions of companies. At the same time. We also key in on the competitive advantages of businesses that we are evaluating.

At Segall Bryant & Hamill we believe companies that participate in niche markets with defendable competitive advantages, are less prone to competitive surprises over time, which is key in sustaining high Return On Invested Capital or improving the ROIC levels of the firm.

The opinions expressed in this video are solely the opinions of Segall Bryant & Hamill or an unaffiliated third party. You should not treat any opinion in this video as specific inducement to make a particular investment or follow a particular strategy, but only as an expression of opinions. The opinions expressed in this video are based upon information considered reliable, but completeness or accuracy is not warranted, and it should not be relied upon as such. Market conditions are subject to change at any time, and no forecast can be guaranteed. Any and all information perceived from this video does not constitute financial, legal, tax, or other professional advice and is not intended as a substitute for consultation with a qualified professional. The opinions and statements are subject to change without notice and Segall Bryant & Hamill is not obligated to update or correct any information in this video. For illustrative purposes only.

Jeffrey C. Paulis, CFA

Senior Portfolio Manager

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