Prospector Opportunity Fund (POPFX) earns Morningstar’s top 5-Star rating. While the fund has done OK in good markets, it is the down markets in which the company shines relative to its peers. Manager Kevin O’Brien recently highlighted two regional banks and a turnaround in the tech space as companies with upside potential and limited downside risks.
OK Upside, Great Downside
Co-managers Kevin O’Brien, Richard Howard, and John Gillespie have a value bent, with a bottom up approach, but one question that they ask about every stock stands out. While many investors ask themselves how much money they will make if a stock investment works out, O’Brien explained to me in a recent interview that he and his partners ask “If this doesn’t work, how much will we lose.”
That type of thinking has helped the fund earn a nearly 8% annualized return since its September 2007 launch, outpacing its Russell 2000 Total Return Index benchmark by over three percentage points through March of this year. A key aspect of that impressive performance was losing “only” 19% in 2008, a year in which the broader market was off by nearly 40%.
Looking for Value
Safety isn’t the only thing the managers consider, of course. Other key factors in the purchase process include a review of a company’s balance sheet strength, management quality, products and/or services, overall franchise or brand value, and an assessment of the company’s business model. The co-managers also look specifically for a catalyst that will lead to improved performance, such as a change in management, corporate actions (a unit sale), or changing industry fundamentals.
Here are three stocks that O’Brien recently highlighted based on their upside potential and their downside protection:
Two Small Banks
While the big banks have been making the news ever since they crumbled during the 2007 to 2009 recession, O’Brien and his co-managers have never been too excited by such companies. The leverage such giant institutions use is just too high. The trio prefers to find smaller banks that use less leverage and simply focus on serving their customers well.
Ocean First Financial, for example, operates in Ocean, Monmouth, and Middlesex counties in New Jersey. It is a basic, small-town bank. It started 2013 with 24 bank locations. Oritani Financial (NASDAQ:ORIT) is another small bank. It has 25 branches in New Jersey’s Bergen, Hudson, and Passaic counties.