Rebecca Hotsko (03:56):

I think everyone wishes that they had the foresight to buy Amazon or any of those companies way back when. So I am curious to know what you think some of the major myths are of investing around small-caps.

Rayna Lesser Hannaway (04:10):

I think the first, and probably the one that’s most cited is that small-caps are risky. And small-caps are more volatile, their stocks do tend to move around a little bit more than larger companies. But we really can’t use market cap as a gauge of risk or stability for our company. We can’t paint the entire category with this broad brush.

(04:38):

And certainly I can understand why small companies can be perceived as riskier, because they’re not well known. But no matter what market caps you’re investing in, different companies have different risk profiles and we as investors make investment decisions based on the basis of favorable risk/reward trade-offs. That’s what we need to focus on in order to deliver strong risk adjusted outcomes for ourselves and for our clients.

(05:09):

And so whether our company is large or small isn’t a key determinant of risk or opportunity, it’s essential to really look under the hood and understand the business to understand the risk and reward.

Rebecca Hotsko (05:25):

As just a quick follow up to that, where do you think investors go wrong maybe if they do or if they have invested in small-caps? Do you see any common mistakes that they make?

Rayna Lesser Hannaway (05:35):

It often comes down to choosing the wrong companies.

(05:39):

Many management teams, especially in the small-cap space, they tell a great story, and they have a great vision, but vision is not nearly enough. To build a great company. You really need to marry great vision with consistently solid execution. And it’s hard to find those two things together.

(06:01):

That is the single most important lesson I learned over my career. And I’ve been looking at small-caps since 1996. I’ve seen so many companies come and go because they had a great product or service, but their success was really driven more by luck than it was by skill. And their management teams didn’t really have the foresight to take the right steps to repeat that growth in the future.

(06:31):

And so choosing the right companies is absolutely the first step on the path to success in small companies. But then once you find one of those great companies, many investors lack that temperament or the patience to stick with those investments for long periods of time. And so often what we see happening is that they sell them entirely at the wrong time. And for a great company, they often sell them too early, looking at their shorter term investment performance and seeing that they got a double or a triple.

(07:10):

But then if a company goes on to be a 100 times the size, that missed opportunity is far more challenging than any short-term gain.

Rebecca Hotsko (07:21):

So I want to get into your checklist of what you look for in these great companies in a minute, but for someone to touch on a point you made there, where investors tend to sell these companies too early. So I’m just wondering what is the optimal time horizon for small-caps, or how can investors think about small-caps playing a role in their long-term portfolio?

Rayna Lesser Hannaway (07:44):

I do think that it’s important to take a long time horizon as you’re investing in these businesses. When you think about the compounding of value over time, it doesn’t happen linearly, and it often takes a long time for these great stories to play out.

(08:02):

And so when you make one of these investments, it should be with the anticipation that you’re going to stay in there for a long time. These great small companies, they have the opportunity to grow stronger and for longer than you can often see today. And often they grow in ways that you can’t see today, but you really need to stay in the game in order to benefit from that growth.

Rebecca Hotsko (08:29):

I’m just wondering if you could touch on maybe some of the other benefits that investing in small-cap companies has. So compared to maybe just an investor who’s a portfolio of large cap growth or even large-cap blue chip companies.

Rayna Lesser Hannaway (08:44):

I’ve talked a little bit about the explosive growth that small companies can experience when you find the right ones. But the other things that I would point to, is that the small-cap asset class on the whole is more inefficient than large caps. And so you’re much more likely to find a great company that’s mispriced, or a great company that’s misunderstood, and that actually, combined with the kind of growth opportunities I referenced earlier, can really work to enhance returns over time.

Rebecca Hotsko (09:21):

I think that was a great point. I really want to dive into now what you look for when you’re assessing and finding these small-cap companies to invest in. Because it seems like the great and maybe hard thing about small-caps is the large number of them. There’s such a high number of small-cap companies to filter through, which makes it harder to identify who the winners might be compared to investing in some of the larger established companies with proven track records.

(09:48):

So, can you discuss your investment process and what maybe your checklist is of what you look for in these small and mid-cap companies?

Rayna Lesser Hannaway (09:57):

When investing in growing small companies, it’s really important to make sure that the right conditions are in place for a company to repeat its growth. And this can’t be distilled down to a single number, or a set of quantitative metrics.

(10:16):

The first thing that we look for at Polen Capital is to make sure that a company is uniquely positioned with durable competitive advantages. The next thing that we look for is that a company has a repeatable sales process. And what we want to see is a very clear and proven recipe for expansion.

(10:38):

We’re not looking for something that’s dependent on the success of a single product without a roadmap for the future. That actually spells disaster in small-cap. Beyond that, we’re looking for robust business models and specifically what we’re trying to find are margin structures that are really conducive to generating a lot of cash and for good returns on capital.

(11:03):

And we want to own companies that can self-fund their own growth. And the reason why we look for this is because we want them to have the financial flexibility to invest in their future, and to advance their competitive advantages in any environment.

(11:20):

And when you think to what we’re going through right now, economically, this couldn’t be a more important point.

(11:27):

Beyond that we’re looking for effective management teams and you need an effective management team to do any of these things well. But what we’re looking for specifically is a lot of evidence of skill, not just good luck, not just good industry drivers.

(11:43):

And we want management teams that have proven that they’re great executors and that they’re good at capital allocation. On the capital allocation front, one of the things that we’re always trying to find with our small companies is that they also have an abundance of value-creating reinvestment opportunities. And this is an essential step for finding these great long-term compounders.

(12:11):

We want to make sure that there are opportunities for a company to reinvest in its future at high rates of returns. And so, think about it as being able to keep that compounding engine going. And oftentimes with smaller companies, if they’re not making those essential investments in the future, what you find is that others come into their market because they’re really attracted by what they see, the high growth rates, the high returns on capital, the strong margins, and they crowd out those markets and that tends to degrade returns.

(12:48):

And so you really want management teams that are multiple steps ahead of the competitors and that are always really laying the path for future success that’s differentiated. And then if we go back to your question about financial metrics, some of the financial metrics that we look for that are really manifestations of some of these conditions that I described are things like sustainable revenue growth or high gross margins, high returns on invested capital, really strong free cash, low conversion.

(13:23):

And then, of course we’re looking for companies that have strong balance sheets and so we don’t want leverage ratios that are going to get in the way of that future success.

Rebecca Hotsko (13:34):

Those were such great points that you touched on, and I think a lot of our listeners can relate to that process where you start by just looking at the business as a whole, figuring out its competitive edge if it has a moat and then perhaps the financials.

(13:49):

But I’m curious to know about the piece where finding these companies in general, because it goes back to there’s just so many of them, a lot of our listeners might use a stock screener or something.

(14:00):

So for them to just find companies to start with in that pool of all the small-cap companies, do you have certain, I guess maybe filters of how you would think about even identifying which ones you want to first start out looking at?

Rayna Lesser Hannaway (14:14):

One of the challenges with identifying great small companies is that you’re often looking for a needle in a haystack, and it is possible to use financial metrics to really narrow down that universe to a smaller group of companies that’s more manageable, and where you can enjoy more successful outcomes because you’re fishing in the right pond.

(14:38):

Some of the metrics that we like to look at to narrow our universe is first to focus on companies that are generating flow and so we’re for positive flow from operations, positive free cash flow, then we’re looking for sustainable growth.

(14:55):

And so not looking at just one quarter or one year, but looking at whether a company has sustainably grown its revenues for a long time, so think one, three, five, 10 years. It all depends on how much data is available to you and what that company’s history is as a public company. But as much data as you can find, to really capture whether that revenue growth is sustainable, is essential.

(15:24):

Next on the margin side, looking for high gross margins and looking for high operating margins is important. And then also looking at things like incremental gross margins, and incremental operating margins and really understanding what happens when a company adds another dollar of revenue, how does that drop to the bottom line?

(15:49):

So that can really tell you a lot about the incremental gross margins and the incremental operating margins and returns for our business.

(15:58):

And then on the return side we find metrics like return on equity, return on invested capital, cashflow return on investment as being really important. We also really like to look at free cashflow conversion metrics, and so can a company turn its net income into free cashflow?

(16:19):

And then on the debt side you want to look at things like their ability to cover their interest payments. Some of the other filters that we apply when we’re looking at our universe is we try to filter out companies that are more commodity-exposed, or that are exposed to things that are really outside of their control, like the FDA with biotechs.

(16:44):

What we find is that it’s really hard for companies like those that aren’t really in control of their own destiny to really deliver that sustainable growth with persistently high returns, and that makes for a much more volatile ride, which is really what we’re trying to avoid.

Rebecca Hotsko (17:04):

I’m wondering if you can talk about the growth piece, because how can we tell if the growth is sustainable and persistent as small-cap companies, by default, don’t really have a long history or proven track records, and the first years of the high double digit growth that they may experience might not persist into the future.

(17:24):

It’s hard for any company to continue to grow at those high rates. So I’m wondering how you think about this piece, so an investor isn’t overestimating that growth piece.

Rayna Lesser Hannaway (17:36):

I can’t emphasize enough how important it is for companies to invest in the future. And when you have small companies that are growing very quickly with high margins and returns on capital, as I said before, it inevitably attracts a lot of competition, and erodes growth and returns. And that’s why we look for the behaviors I described earlier.

(17:58):

But beyond that, it’s important to acknowledge that for most companies, it’s safe to assume that high double-digit growth rates will not persist. And this is why we prefer to focus on companies that don’t stand out for growing the fastest, but instead we focus on whether growth is at a manageable level that can be repeated for several years.

(18:24):

If you look at what really drives great outcomes in small-cap over a long period of time, it’s really not about the absolute level of growth, especially when it’s not repeatable, it’s about the duration of growth. And so finding companies that are growing at levels that they can repeat over and over and over again is important and that’s really hard to do if you’re in that high double digit arena. I’ve rarely seen it done.

Rebecca Hotsko (18:55):

One issue that comes to mind when investing in growth companies is that sometimes with growth companies what happens is investors maybe bid up the price because they get over-excited about the growth prospects, which sometimes can lead to a lower expected return.

(19:11):

So I guess I’m just wondering how you think about factoring in whether the small-cap growth companies are overpriced or not.

Rayna Lesser Hannaway (19:20):

I think that what’s really important first is to understand the business that you own, and really try to map out what you believe may happen in the future, and also what it can look like when things go wrong.

(19:35):

When we’re Investing in these companies, it’s not all about just painting the rosiest picture and we can paint Rosie pictures, but that’s not what drives great returns. It’s really about understanding both the rewards and the risks associated with investing in these businesses.

(19:54):

And you do run the risk of paying too much. And it also can happen that if you’re not mindful of the downside and really understanding what can go wrong investing in many of these businesses, that the outcome can turn out far worse than what you expect.

Rebecca Hotsko (20:13):

And I am curious to know then about the differences perhaps between a small-cap growth strategy versus a small-cap value. So you are more focused on small-cap growth. I’m just wondering your conviction behind that versus maybe a small-cap value play.

Rayna Lesser Hannaway (20:31):

At the end of the day, I don’t really subscribe to the nomenclature around small-cap growth or small-cap value. When you think about what investors are trying to do, every investor, no matter what kind of asset they’re investing in, are trying to invest in assets that are undervalued. And that’s what we do on the growth side.

(20:51):

We try to find these great companies that have the potential to grow longer and stronger than you can see today. They’re on the right side of change. They’ve got these great management teams that are investing for the future. And what we find is that many of those opportunities are more compelling for a long-term investor.

(21:13):

There are many small-cap value-oriented companies that you can make money on in the short term, but many of them in my universe I would refer to as the serial small-caps, they’ve actually been in my small-cap universe for 20 to 30 years. And so it’s really more about catching the right wave with those, and then getting off and going to find another one that you can do it with, and that’s simply not what we’re focused on.

(21:41):

The other thing that I would point out is no matter what you’re investing in, it’s really essential to understand who you are as an investor. And for me, I get really excited about finding these promising small-cap businesses that have the potential to be much larger in the future, but I have the right temperament and humility and patience for that, and not all investors have that.

(22:08):

And so I do think it’s essential to really figure out who you are as an investor and make sure that that matches up well with what you’re investing in.

Rebecca Hotsko (22:19):

I’m interested for you to talk a bit about the move towards digitalization, and how that’s impacted small-cap companies. Has it benefited them or have they got lost in this wave?

Rayna Lesser Hannaway (22:33):

It’s so exciting to see what the impact of digital has had on my universe. The reason why we’re so excited is that digital really enables these small companies to scale faster, to be larger, to be more profitable than they ever could be before.

(22:53):

They have a much higher likelihood of success when they’re pursuing adjacencies. They also have much better access to talent than ever before, especially in this remote working world. And what we found is that when it comes to building small brands, it’s really a different playbook today with digital that changes the risk and reward for these companies.

(23:18):

So, take for example a company trying to build its brand in the 1990s. Oftentimes what would happen is that you had to spend millions and millions of dollars, things like advertising and marketing. And if you were building a physical product, you needed to invest a lot in inventory that was essentially unproven, where you didn’t really have a good read yet on what the customer behavior would look like, and you had to develop these channel relationships and put all that inventory out there and then just hope that it would sell. When you think about what that costs, it was simply unattainable for many small companies to take that path.

(24:02):

So let’s compare and contrast that with today. Companies today that are trying to build brands and that are wisely using digital, they can use social media, which really goes a long way in terms of driving unaided brand awareness for these businesses and basically need to have fans and those fans then represent the business for them and that’s not costly.

(24:28):

And then when you think about these direct-to-consumer relationships that companies are developing, they’re much closer and more connected to their customer than they ever were before. And they can use those relationships to do lower risk research and development. Take Yeti for example, which is a company that we own in our portfolios at Polen.

(24:52):

Yeti, when they’re thinking about introducing a new product to their loyal fanbase, they can simply mock up that product on their website, and see what the response is from their customers, and then they can do short inventory investments to deliver, if there’s customer interest before making bigger commitments to those new products.

(25:18):

And so when you think about it, they don’t need to put millions of dollars behind introducing a new product.

(25:25):

Instead, they can do some testing and reacting, which is a much smarter approach. And so when you think about demographically what this means, these changes in behavior that we’ve seen with the broad adoption of the internet and the way that younger generations, millennials and Gen Z really use things like social media and it’s important to them to get third-party information on how people feel about products and services. That really works in favor of these small companies in a way that was just impossible for them to access ever before.

Rebecca Hotsko (26:07):

I’m curious if you can talk a bit about how small-cap and maybe small-cap growth companies typically perform in high inflation, rising interest rate and low-growth environments.

Rayna Lesser Hannaway (26:21):

We believe that the recent dislocation of high quality small-cap growth stocks provides a great buying opportunity for those focused on the long-term as long as you remain diligent and disciplined and cautious. Certainly my message today has been that you have to be selective when you’re choosing these companies and that certainly holds in this environment, even more so.

(26:48):

So if we broaden out and think about the small-cap asset class, it’s pretty typical for small-caps to come under a lot of pressure when you’re early in a rate hiking cycle. And that’s what we’ve seen this year. But often, what happens during the second half of tightening cycles is that small-caps tend to outperform. And we can look back at previous rate hiking cycles and see this, and I would specifically point you to looking at the strong small-cap performance we’ve seen in past cycles when you look at 18 or 36 months after rates begin to rise.

(27:26):

And then on inflation, it’s really important to go company by company, and focus on those companies that have the ability to outgrow inflation. Some of the things that we look for as indications that they might be able to do this are high gross margins, which is often indicative of having a lot of pricing power.

(27:50):

We’re also really looking for companies where there are very tight customer relationships and a long history of customer relationships and customers continuing to do business with those businesses year after year. These are the kinds of companies where you can get more comfortable that the problem that they’re solving for their customers is really an essential one, and where it’s just not easy to turn the business off and on.

(28:19):

These are the kinds of companies that we like to focus on and we’ve already seen from many of our portfolio companies that they do have an ability in this environment to take advantage of pricing power and in some cases it’s even driving better margins for them and more operating leverage.

Rebecca Hotsko (28:37):

So I looked this morning at where this small-cap indexes we’re sitting and there’s obviously a few different ones you could look at, but by just looking at the Russell 2000 and the SmallCap 600 Index, they’re still down about 24 to about 28% from the peak, whereas the S&P’s 500’s down about 20% from the peak. So I’m just wondering if you think that maybe the downturn is already priced into these small-cap companies where you think that look is for the sector right now?

Rayna Lesser Hannaway (29:09):

So while there’s definitely a structural case for owning small-caps, we do think now is a particularly interesting time to consider investing given the multiple compression that we’ve seen. The multiple compressions so far this year has been as severe as we’ve seen in a very long time.

(29:27):

If you look at just the Russell 2000 growth index, which is what we use to compare our funds to the, four PE was 45 times at the end of last year and now it stands at 23 times. So, basically it’s contracted 50% this year. And when you look at the underlying fundamentals of companies, it just doesn’t match up.

(29:51):

Most of the companies that we’re looking at are actually holding up very well. Their earnings are still growing strong. And so what this seems to suggest to us is that investors are really taking a very dim look on the macro picture and that these stocks, particularly those in the consumer discretionary sector are pricing in a recession.

Rebecca Hotsko (30:15):

Can you talk just briefly on why that multiple compression is a good thing, and why that potentially is I guess a positive outlook going forward for that sector?

Rayna Lesser Hannaway (30:26):

For any investment that you make in equities, when you think about where your return comes from, it really comes from two places. It is the earnings and cashflow growth that a company can deliver, and then you either get the benefit of the multiple expanding or the multiple contracting.

(30:45):

And right now we’re at a point in time where we’ll get the earnings and cashflow growth with what we believe to be is multiple expansion. And so that works to actually enhance your return over time.

Rebecca Hotsko (30:59):

That was really helpful. I want to move on now to some of your specific companies and stock picks. I’m wondering if you can talk about some brand names that you think have great potential that investors may not realize are small companies with a lot of potential for growth.

Rayna Lesser Hannaway (31:17):

Sure. And maybe to start, I will kick it off by talking about Five Below, and many of you may know Five Below, they are the leading high growth retailer that really specializes in trend, right high quality products that tweens and teens and even adults love. And my kids love going to Five Below. And honestly, as a parent it is a lot better going to Five Below and spending 10 or $20 on a number of toys, than you walking into a traditional toy store and dropping $50 on a box of Legos. Sorry Lego.

(31:56):

But so the company offers this really fun treasure hunt like shopping experience and most of the items that they sell are actually priced between one and $5. So it is very affordable and it’s really compelling to a wide range of customers with different economic backgrounds. And it’s a company that can thrive in different economic environments, which is something that we need to focus on today because we know that consumers are all feeling the pressure of inflation.

(32:27):

And so there’s an opportunity for Five Below to benefit from consumers trading down and looking for new places to buy their products, their toys for their kids, which we know they’re going to keep buying, but they can save money by going to a place like Five Below. And so it’s a concept that really plays well not just to this environment but to every environment. And you can feel more comfortable in this inflationary environment that Five Below can do well.

(33:00):

But the thing that really is going to drive this business over a long period of time is that the company has the ability to triple its store base by 2030, and to double its top and bottom line by 2025. And so when you think about that, that’s really compelling.

(33:20):

I’ve seen over my career, when you look at retailers, you find those that they have really compelling store economics, have a loyal customer base and really have the skills to identify new geographies and then open stores one by one in new locations in those geographies, leveraging that great brand and customer loyalty, that can really drive some great outcomes, and some very predictable outcomes. And so that’s one that we’re really excited about.

(33:52):

There’s a long runway there, and I haven’t even talked about the PE, I focused on the business, but the PE is also significantly lower than what the company has enjoyed over several years. And so this is one where multiple expansion can boost returns above and beyond what the business will deliver.

Rebecca Hotsko (34:13):

I’m curious to just quickly touch on how your valuation process for these businesses, so are you using a discounted cashflow or what is your approach to valuing small-caps?

Rayna Lesser Hannaway (34:25):

We don’t have any one specific approach. Instead we use all of them to try and understand what the value of a business is. And what we really try to do first is to understand the business because you can really be steered in the wrong direction if you try to make assumptions about the business without first being able to contextualize the numbers that you see in a company’s history.

(34:50):

And so, it’s really important to start there and understand the past and then you can start thinking about what the possibilities are for the future. And we model out all of our companies on a five to 10-year basis, and then we take different valuation metrics, including looking at a discounted cashflow statement for each company, to really arrive at what an expected value for that business can be.

(35:15):

And it’s not all about looking at just what happens in a good scenario, it’s about understanding what might happen if you’re wrong too, and things go South.

Rebecca Hotsko (35:26):

And I’m wondering if you can talk a little bit about Etsy. I know that’s also on your list, and one that a lot of our listeners might be familiar with.

(35:35):

Can you walk us through your investment thesis on Etsy and talk about how it meets your checklist?

Rayna Lesser Hannaway (35:42):

Sure. So Etsy is a business that I know many are familiar with, especially after the success that the company enjoyed during the pandemic, where they really stepped up, and their sellers were selling masks when we most needed it.

(35:56):

So they operate a two-sided marketplace and they mostly sell unique handmade items, many of which you can’t purchase anywhere else, and we really like that, but it’s hard to scale a business like Etsy, and they’ve shown a lot of success in doing so.

(36:14):

There’s a massive addressable market here and we feel really confident in the company’s ability to repeat their success simply by adding new buyers and adding new sellers, and then driving more transactions between those buyers and sellers.

(36:32):

During the pandemic, the company took advantage of a massive customer acquisition opportunity that they probably will never see again, in terms of bringing a lot of new buyers and sellers onto their platform.

(36:47):

And while the stock is down this year as people are concerned about their ability to deliver growth, after having grown at this accelerated pace during the pandemic, what we see is a company that is incredibly strong that’s actually doing quite a good job of holding on to many of those new customers and that has a robust business model with very strong margins, and strong returns on capital, that has the potential to be even far more profitable as the company scales.

(37:25):

This is a management team where we’ve been incredibly impressed with their approach. They’re really taking this brick-by-brick approach to building the business and they’ve made a lot of smart decisions, especially during the pandemic that we believe sets them up very well for the future.

Rebecca Hotsko (37:43):

Yeah, it seemed like there were a few companies that were for sure beneficiaries of the pandemic, but it sounds like you think that that is sustainable and persistent going forward.

(37:55):

Another company that I thought was interesting on your list is Bumble because they have a lot of competitors. And so I’m wondering if you can walk us through your conviction on this one.

Rayna Lesser Hannaway (38:08):

So Bumble is the leader in the large and growing online dating market, and they have two of the highest grossing apps in this space, Bumble and Badoo.

(38:18):

While there may be some smaller regional players across the world, the truth is that the game is really about Bumble and about Match that has Tinder and Hinge, and it’s not an easy business to compete in because you really need scale in your network, and you need high unaided brand awareness, which both Match and Bumble have today. But many of these smaller players don’t really have it.

(38:47):

It’s a business where if you’re successful and you make a match, those customers end up turning off of your service naturally and so you’re always needing to add new customers, and that’s what makes it hard for these smaller companies with unaided brand awareness to do. And so if we look at the market, dating online, it’s a $5 billion annual market that’s actually accelerating, coming out of the pandemic.

(39:15):

And the reason that that is happening is that there used to be a stigma associated with online dating, but that really went away during the pandemic. And then as we have Millennials and Gen-Z daters, they’re just more comfortable with doing everything online. There’s more opportunity for companies like this to grow.

(39:38):

And so it’s a market where there’s low penetration in some parts of the world today, but where we think there’s a lot of potential. And Bumble’s really done a great job delivering growth so far with a business model that’s really robust. It has strong profitability, it has strong cashflow generation, and we believe that we’re at a point in time right now where they’re making some investments that may actually unlock future opportunities for them, that most people are even unaware of. So Bumble’s actually doing something that take them beyond dating with other social products.

(40:16):

They have a product called Bumble BFF that’s focused more on platonic friendships, and then they have a product called Bumble Biz, which is really more about business networking. And just like the original Bumble app, they really put women at the center of these things, and that’s something that we really like.

(40:38):

We believe that women have unique preferences and Bumble is really best positioned to deliver on those. And so we’re really excited to see Bumble make these investments in other areas, where they can leverage their knowledge and their success and their brand and increase their TAM.

Rebecca Hotsko (40:57):

That was really great to hear you walk through your thought process and conviction behind all these stocks.

(41:04):

I guess one last question that comes to mind for me is there anything else you look for when assessing these companies to assess the persistence of this growth? Is there just any other things that you look for in small-cap companies that investors should be aware of?

Rayna Lesser Hannaway (41:21):

I referenced earlier how important it is to find effective management scenes, and I think that it would be helpful to double-click on that and really talk about some of the things that we look for as indications of that. And so the first thing is that we’re really looking for purpose-driven management teams and purpose-driven cultures. And in today’s world where there’s just so much information available out there on the internet on any company you could be investigating, it’s important to look for that.

(41:54):

Then, on the cultural side, I think it’s important that you find a company that is the right cultural match to their competitive positioning, and then what you want to see are companies where there’s a lot of evidence that they’re willing to experiment and learn from failure. If you look at some of the most successful companies today, especially the big tech companies that we’re all familiar with, they’re really good at this. And this is a behavior that we always look to see in our small companies.

(42:26):

The other thing is having a focus to building around the core business. So I talked earlier about adjacencies and you really want companies to be doing things that are adjacent, and that think about growing their business in a way that’s very disciplined, and where you could have these concentric circles.

(42:48):

You don’t want companies that are making investments that are out of left field, that really are inconsistent with what you believe that brand to stand for, or that really go after an audience that isn’t a captive audience for them. You want them to expand their business in ways that really leverage their past success and the relationships that they have. And then on the customer side, you want to find companies that take this customer-centric approach and that really put themselves in the shoes of a customer and solve a real problem.

(43:27):

There are a lot of companies out there that don’t have this customer connection, and a lot of what they do is not based on those customer relationships, and a real understanding of what their customers want.

(43:42):

Yet, when you’re looking for these businesses that have the ability to repeat their growth year in, year out, the ones that have these great feedback loops in place where they can really understand what their customers are looking for, and figure out how to deliver that, those are the companies that can hold onto those relationships in good times and in bad.

Rebecca Hotsko (44:04):

That was really helpful. Thank you so much, Rayna. I think that we all came out today with way better skills on how to assess and analyze the small-cap and mid-cap space.

(44:16):

Before I close out the episode, where can the audience go to learn more about you, your work and everything that you do?

Rayna Lesser Hannaway (44:24):

We have a great website at Polen Capital. It’s www.polen.com and on there you can read all about what we do and how we do it. I have an amazing team that I work with that was really purpose built to do justice, and I’m so proud of them and you can go there and learn more about all of us.

Rebecca Hotsko (44:47):

Thank you so much, Rayna.

Rayna Lesser Hannaway (44:49):

Thank you. I really enjoyed this conversation today.

Rebecca Hotsko (44:53):

All right. I hope you enjoy today’s episode. Make sure to subscribe to the show on your favorite podcast app so that you never miss a new episode. And if you’ve been enjoying the podcast, I’d really appreciate it if you left us a rating or review. This really helps support us and is the best way to help new people discover the show. And if you haven’t already, be sure to check out our website, theinvestorspodcast.com.

(45:18):

There’s a ton of useful educational resources on there, as well as our TIP finance tool, which is a great tool to help you manage your own stock portfolio. And with that, I will see you again next time.

Outro (45:31):

Thank you for listening to TIP, Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday we teach you about Bitcoin and every Saturday We Study Billionaires, and the financial markets.

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