Stacy Ruchlamer spent ten years at Lehman Brothers as a securities analyst before starting her own fund. At age 27, she became the youngest analyst ever to make Institutional Investor's All America Research Team as number one in the specialty retail category. She stayed on the All America Research Team for four years, earning an additional rank in broad line retailers. Toward the end of her tenure at Lehman, she began managing money for the firm which eased her transition to the buy-side. In February 1993, she started the New York-based Consumer Fund, L.P. with $2.7 million in capital primarily from herself and a few CEOs of retail companies. The fund was one of the early sector hedge funds which have since gained in popularity. Over the past nearly five years, the fund has grown to $25 million and achieved a net compound rate of return of 19% without a single down quarter. Stacy Ruchlamer talked to HFN publisher, Antoine Bernheim, in late October 1997.
Profile of Stacy Ruchlamer
Born: February 4, 1962 in New York
Education: BA, Union College
Family: Married, two children, Jessica and Samuel Andr?
Last vacation: Martha's Vineyard, Massachusetts
Last book read: Fugitive Pieces by Anne Michaels
Hobbies: Reading, running, football and flowers
Favorite quote: "The glass is half full"
How she best describes herself: "Happy"
Q. How do you define your sector?
A. Consumption represents about two thirds of America's gross national product, thus the consumer stocks' sector is vast and dynamic. We focus primarily on the textile, retail and manufacturing sectors. We look specifically for two kinds of situations: firstly, great American name brand manufacturers where the name brand inherently differentiates the product and creates a barrier to entry and where order backlogs are a good early indicator of future trends; secondly, we focus on "category killer" distributors where being first and best in a particular area is a barrier to entry. Barnes & Noble and Tiffany would be good examples of the latter. Over the years, I have developed an ever changing list of about 100 consumer companies in which I make my selections for the portfolio.
Q. Could you describe your research process and the resources you use?
A. I want to own quality consumer companies which have upside earnings potential and commensurate multiple expansion. I find ideas from within my universe of 100 companies, industry sources, initial public offerings and scouting malls. When I sense that a company is gaining momentum, I begin the research process. Initially, we visit stores and showrooms to see the actual products. Our next step would be to visit the companies in their headquarters and meet their management teams. Importantly, I develop my own earnings models to try to find discrepancies between what I believe a company can make and what the Street consensus numbers are. Lastly, we try to understand the catalysts in both the short and long-term which can get the stock discovered and thus moving.
Q. The consumer sector includes a lot of fads and a few long-term success stories. How do you assess which category a young company is most likely to fall into?
A. I seem to have developed an intuitive sense on fashion and consumer products and I have been very lucky to avoid a lot of the fads. Over the last ten years, I have met with many management teams and have found that the expertise of the management team is the critical ingredient in brand development: how the management develops the product offering and the marketing to go around it determines whether a name such as Hush Puppies is going to be a short-lived fad or the revitalization of the company.
Q. Could you give us an example of a stock you find attractive and why?
A. At this point, I have a 10% position in a company called the Movado Group which is primarily a watch manufacturer. The biggest names in their portfolio are Movado, Concord and ESQ. Since becoming a public company, they have had a good steady record of sales and earnings growth. I feel that the management team is uniquely qualified not only to continue to grow their existing business but also to take the company from a 15% grower to a 20%-25% grower through acquisitions and internal development. They have signed the licensing rights to develop a brand of Coach watches and in the Spring of 1998, they will be introducing a whole new array of Movado products from table top to jewelry to gifts. I think these are two viable ideas that will enhance their sales and earnings growth rates. The stock is selling at 14 times earnings and I believe it could sell at 20 times, thus creating a 50% upside for the stock.
Q. What is the mix between trading and investing?
A. For the most part, I am an investor. There are a lot of trading opportunities so I could envision doing more trading but I spend most of my time visiting and talking with management and trying to find good long-term positions.
Q. Could you describe the typical structure of your portfolio?
A. My portfolio typically has 15 to 20 positions. Several represent 7% to 9% of the fund's capital where my level of conviction is high and where there is a short-term catalyst or an unusually low price to earnings ratio. I do not use any leverage and I very rarely sell stocks short.
Q. How do you control risk and what is your approach taking profits and cutting losses?
A. I am the largest investor in the fund and my obsession is never to lose money. I have only had a handful of down months over my five year tenure. The way I control risk is really by staying in very close contact with the senior management of the companies that I follow as well as cross-checking their information with industry sources and store visits. At the first sign of a change in trend, I sell the position. For instance, if a company's backlog deteriorates significantly, I sell and ask questions later. Additionally, I usually hold a significant cash position to cushion difficult times. Conversely, if the price of a stock deteriorates for no fundamental reason, I tend to use this as an opportunity to increase my exposure. In terms of taking profits, when I establish a position in a company's stock, the price to earnings multiple is always at a discount to what I perceive to be the company's long-term growth rate. Once the stock appreciates to a multiple equivalent to one times the company's growth rate, I start taking profits.
Q. How large would you like your fund to be?
A. I could manage a fund double or triple our current size in the same manner as I operate today. However, as I like to find undiscovered ideas which are usually less liquid, I would not want to grow much beyond a $75 million to $100 million business. One of my strengths is to quickly sell a position whenever I sense a negative change in trend and this is a critical edge that might be compromised if my capital exceeded $100 million.
Q. There is a category of investors who find sector funds difficult because they feel the need to time when the sector is in vogue. How do you make money consistently in a sector fund?
A. The consumer sector is large and always changing with new dynamic companies replacing yesterday's superstars. Even when the sector is out of vogue or during the seasonally slow times of year, there are always big winners and losers. Unlike other industry sectors which move as a group, the consumer sector can be thought of as the "haves" and the "have nots". For instance, as sneakers lose popularity hurting Nike and Reebok, the brown shoe companies gain market share benefiting Timberland and Wolverine. I am very careful with our positions. My goal is to make a little money each month and to be steady and consistent.
Q. Do you see any major trend in the consumer sector over the next several years?
A. The only trend I feel very strongly about is that the rate of change will continue to accelerate. Concepts are maturing so quickly that it is critical for companies to be number one in their respective fields. They must be number one in the consumer's mind in terms of name recognition and they must establish the best locations and the best alliances whether it be on the internet or in a shopping mall.
Q. There are many top-ranked female analysts but you are one of a small number who has made the transition to managing her own hedge fund. Why so few and what do you think accounts for your success?
A. Many female analysts follow industry sectors and perhaps many of these sectors do not lend themselves to hedge fund investing. I was fortunate enough to follow the consumer stocks as a sell-side analyst and the transition to the buy-side was manageable. In fact, the decision to go to the buy-side was also a lifestyle decision: now, I control my travel schedule and my work hours. In terms of what accounts for my success, over the last ten plus years I have developed an understanding for what moves consumer stocks. As I do my research, I am looking for certain fundamentals, strategies and growth plans and if the stock is selling at a P/E multiple below its growth rate, I get interested. Lastly, I believe my good fortune on Wall Street is due to my focus and intensity to succeed. u