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mediocre company and at least make this transition, can they continue to systems needed to increase its scale,
it above average. operate their core businesses well adapting to the secular trend toward
Early-stage innovative companies while consistently laying the seeds for mobile technology and enabling the
account for about a third of the New future growth, are they being intel- company to build a platform that it
Horizons Funds holdings. Mr. Ellen- lectually honest about their challenges could monetize.
bogen has found that for a company and properly measuring whether or
UPHSPXMBSHFSPWFSUJNF
JUPFONBZ not they are succeeding? Value, Too
need to move from its first act to a Twitter is one example, he says. Exceptional performance does
second act in which it goes beyond The New Horizons Fund invested in not just come from high-growth
its initial business model. the real-time social media company companies. Value investors seek the
Sometimes companies have to go in 2009. Although it was still a same outcomes but from a different
through transitions, and we ask our- private company with a market value starting place.
selves whether it is prepared for this, of less than $1 billion at the time, Were trying to find companies
he says. Are the people and process Mr.Ellenbogen says its Act I was well that may offer the same kind of
systems able to scale and adapt to underway, showing rapid user growth. compelling growth prospects but
change, is there a strong management As the companys leadership theyre not necessarily fully valued
team that realizes it has to handle matured, he says, it invested in the and are actually cheap, Mr. Wagner
Defying the Odds: Companies That Gained at Least 20% Annually During a Poor Decade for Small-Cap Stocks
December 31, 1998, Through December 31, 2008
To identify companies that achieved 20% or more annualized returns over a decade, the study examined all companies
in the Russell 3000 Index with $1 billion to $3 billion in market capitalization over rolling 10-year periods, from 1996
through 2013. That periods worst-performing decade ended December 2008, with small-cap stocks (as measured by
the Russell 2000 Index) earning an average annual return of only 3%. In that period, only 11 companies averaged 20%
or better annually.
Average Annual
Average Annual Median Annual Median Annual Largest 12-Month
Company Industry Return on
Return Sales Growth Earnings Growth Price Decline
Invested Capital
Gilead Sciences Biotech 34.9% 50.9% 6.4% -5.3% -5.3%
Caremark Health 30.1 26.7 11.4 68.9 -21.1
C.H. Robinson Worldwide Transport 25.1 12.7 20.1 27.2 -10.6
EOG Resources Energy 23.2 10.0 27.1 18.3 -28.1
Varian Medical Systems Health 22.6 12.9 14.5 22.3 -24.2
Apache Energy 21.9 24.9 26.3 14.2 -27.1
Expeditors International Transport 20.8 17.5 20.1 23.2 -35.1
Express Scripts Health 20.7 22.5 25.6 17.5 -51.4
Mandalay Resort Group Gaming 20.5 11.2 7.6 2.5 -36.7
Harrahs Entertainment Gaming 20.3 13.7 10.4 6.8 -22.1
Phelps Dodge Mining 20.2 11.3 18.8 1.6 -40.1
Note: The total cohort for this decade consisted of 604 companies in the Russell 3000 Index (excluding the 20% plus gainers) that
had a stock market capitalization of $1 billion to $3 billion at the start of the decade. As of June 30, 2014, none of the stocks in this
table were owned by the New Horizons Fund, the Small-Cap Stock Fund, or the Small-Cap Value Fund.
troweprice.com 9
Small-Caps
Continued from page 9
says. These are companies that for small companies might achieve Also, when you find something
whatever reason may have fallen on outperformance, Mr. Athey says. really good thats working well for
hard times and their returns may The first is that it is truly a growth you, you should appreciate thats a rare
actually be decreasing, but with the company and consistently puts up thing. You have to recognize that you
strategic moves that could actually high-growth numbers. The second is are going to look at a lot of companies
make them look like a growth stock a company that may be near bank- before you find one that could be a
down the road. ruptcy or is really deep value and it really big compounder of returns.
Mr. Athey adds that value investors comes back from the dead.
sometimes can just catch lightning
in a bottle. The company may be near
bankruptcy or is a really deep value
Whether a growth or value investor...the studys lessons are
situation. But it turns out that the the same: Think long term, be patient, and recognize that
company or industry is not dead and even the best companies on the planet will have periods
over a period of time you can make an
extraordinary return. when things dont look so good.
Cliffs Natural Resources, for
example, is an iron ore producer that The third is a little of botha Small companies tend to have
Mr. Athey acquired in 2000. (It was company that may be under the radar less experienced management and
known then as Cleveland-Cliffs.) screen, perhaps with a checkered unpredictable earnings growth on
At the time, the world was sup- history, and its really cheap, but limited product lines, which can cause
posedly never going to build another not because its a horrible company. their stock prices to fluctuate more
steel mill, never need another ton of Its just been neglected and hasnt than larger firms. As of June 30, 2014,
iron ore, and so the stock was trading performed very well, but maybe Flower Foods accounted for 1.28%
below book value, he says. Then new management comes in and the of the New Horizons Fund; Twitter
in 2007, all of a sudden the Chinese company starts doing better. was not in the fund. Cliffs Natural
are building steel mills, the United Whether a growth or value investor, Resources stock was not held by the
States is still making steel, and iron Mr. Wagner says, the studys lessons are Small-Cap Value Fund.
ore prices are going way up. So in this the same: Think long term, be patient,
case management didnt change, but and recognize that even the best com-
the environment changed. panies on the planet will have periods
There generally are three ways when things dont look so good.
Taking the Long View: Small-Company Funds Turnover Rates Have Been Relatively Low
As of December 31, 2013
T. Rowe Price managers typically take a long-term perspective when investing in smaller companies, as reected in the
number of companies held in these three small-cap funds longer than 10 years and in these funds relatively low turnover
rates compared with their peer group averages.
*Four other stocksWoodward, Coal Creek, Heartland Express, and Makepeacewere also initially acquired by the fund that year.
Note: As of June 30, 2014, Henry Schein accounted for 0.69% of the New Horizons Fund; Culp made up 0.15% of the Small-Cap
Value Fund; and Glacier Bancorp, Makepeace, Coal Creek, Heartland Express, and Woodward comprised 0.69% of Small-Cap Stock
Fund assets.
Sources: T. Rowe Price and Morningstar, Inc.
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