Podcast: Millennial Investing Talks Small Caps with Rayna Lesser Hannaway

How a selective, research-driven approach can help identify mispriced, misunderstood companies in an inefficient space

Podcast Highlights

Rayna Lesser Hannaway, head of Polen Capital’s Small Company Growth team, sat down with the Millennial Investing podcast to discuss the dynamic world of investing in small- and mid-cap businesses. She debunks some common myths, underscores the power of sustainable and persistent growth, and breaks down the investment approach that helps her team have confidence that they are “fishing in the right pond” when searching for what could be tomorrow’s biggest leaders.

Listen to the full podcast here →

We always try to find small companies with an abundance of value-creating investment opportunities to keep that compounding engine going.

—Rayna Lesser Hannaway, CFA
Head of Team, Portfolio Manager & Analyst, Small Company Growth

  • Starting off as a small cap tech analyst in the 1990s, Rayna had the good fortune of covering several companies that would grow exponentially to become the giants we all know today. Having a front-row seat to this growth – watching companies like Amazon and Netflix compound significant value over the years – has impressed upon her the power of finding tomorrow’s leaders, today.
  • Rayna challenges the commonly held belief that small caps are risky. She acknowledges that it’s true that they can be more volatile; they may move around a bit more than larger companies. However, she believes you can’t use market capitalization alone to gauge risk or stability. Investors shouldn’t paint the entire category with the same broad brush.
  • Many management teams, especially in the small-cap space, can tell an impressive story and have a great vision. But that’s not nearly enough, according to Rayna. To build a great company, you must marry that vision with consistently solid execution.
  • For the investment team that Rayna leads, identifying the conditions that support repeatable growth can’t be distilled down to a single number or set of quantitative metrics. Polen seeks uniquely positioned companies with durable competitive advantages, a clear recipe for expansion, and the financial flexibility to invest in their future. The team is not looking for success that depends on a single product without a roadmap for the future, as to them – that would spell disaster in small cap.
  • Rayna describes the financial metrics her team uses to narrow the universe of potential investment opportunities. The analysts prioritize companies that generate positive cash flow from operations. They also examine whether companies have sustainably grown revenues, with time horizons dependent on the data available. Additionally, they look at gross and operating margins to understand what happens when a company adds another dollar of revenue – how does it drop to the bottom line? Can the business convert net income to free cash flow? On the debt side, they look at a company’s ability to cover interest payments.
  • The Polen investment approach tends to filter out companies highly exposed to factors outside their direct control, such as commodities, or biotech companies tethered to the U.S. Food and Drug Administration approval process. In Rayna’s experience, it’s harder for companies like these – who often aren’t entirely in control of their own destiny – to deliver sustainable growth and persistently high returns over time.
  • Rayna offers her perspective on the dramatic multiple compression in 2022 and what it suggests for the path forward. She explains how the dim macro view that many investors have held can overshadow the underlying healthy characteristics of individual businesses and offers examples of companies that she believes have the potential to thrive in a variety of economic environments.

Listen to the full Millennial Investing podcast here →

To us, whether a company is large or small is not a key determinant of risk or opportunity. It’s essential to look under the hood & understand the business.

—Rayna Lesser Hannaway, CFA
Head of Team, Portfolio Manager & Analyst, Small Company Growth

Important Disclosures
Please note that this document is a condensed summary of the full interview conducted by the Millennial Investing podcast. There is no guarantee that the investments selected will perform as expected. Some holdings may lose value.

This information is provided for illustrative purposes only. Opinions and views expressed in this podcast are as of July 2022 and may involve a number of assumptions and estimates which are not guaranteed and are subject to change without notice or update. Although the information and any opinions or views given have been obtained from or based on sources believed to be reliable, no warranty or representation is made as to their correctness, completeness, or accuracy. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice, including any forward-looking estimates or statements which are based on certain expectations and assumptions. The views and strategies described may not be suitable for all clients. This document does not identify all the risks (direct or indirect) or other considerations which might be material to you when entering any financial transaction.

The information provided should not be construed as a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed herein will be in the portfolio at the time you receive read this or that any securities sold have not been repurchased. The securities discussed do not necessarily represent the entire portfolio. Actual holdings will vary depending on the size of the account, cash flows, restrictions, and any trade orders in progress on the date as of when holdings are shown. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable or that any investment recommendations we make in the future will equal the investment performance of the securities discussed herein. For a complete list of Polen’s past specific recommendations holdings and current holdings as of the current quarter end, please contact [email protected].