Private Wealth

July 8, 2009

No-Nonsense Investing


When Bryan Auer owned a health and beauty aids company back in the 1970s, he decided to update his product packaging with new lithographed labels. But he wasn’t paying attention to every detail. Before he knew it, his purchasing agent had bought a ten-year supply of packages for Icy Hot, an analgesic that represented less than 0.01% of the company’s sales. Auer nearly fired him.

Then something unexpected happened. Hoping to get rid of the boxes upon boxes of Icy Hot, Auer hired an advertising agency to promote the product. The campaign turned out to be a screaming success. The Icy Hot name caught on and annual sales skyrocketed to $10 million, netting Auer a small fortune. It also taught him a valuable lesson: You never know what’s going to sell.

“We thought it would be a flop. It sold like hotcakes. We couldn’t make it fast enough,” says Auer, 73. “It showed us you can’t always look at a company and tell how well it’s going to do.”

Auer’s insights, however, led to much more than just a bonanza in the analgesic business. Auer, with the help of his son, took his Icy Hot fortune and built it into a successful growth portfolio. About 20 years later, the portfolio was converted into a retail mutual fund—the Auer Growth Fund—managed by SB Auer LLC, an investment management team in Indianapolis headed by Auer and his son Robert. In just slightly over a year, the fund’s assets have more than quadrupled, to a total of $135 million.

Categorized as a small-cap growth fund by Morningstar, the Auer Growth Fund will delve into the mid- and large-cap sectors if a company has strong growth and a cheap price.

The fund’s philosophy, in essence, still has its roots in Auer’s early lessons about what it takes for a company to be successful.

“A lot of people say a company will do well if it has good management. But I’ll take a dumb manager with a good product that sells well over a Harvard manager who is brilliant but is in a bad business,” he says.

Flush with cash from his Icy Hot sales, Auer took his money in January 1987 to Robert, then 25-years old, who was a broker for Dean Witter in Indianapolis, and asked him to invest the money. But Robert had to follow his father’s strict instructions. Bryan Auer said he didn’t want the firm’s stock research, and he didn’t want their advice or the advice of his son. He had his own ideas. He wanted the money invested entirely in stocks, and only those with earnings growth of greater than 25%, sales growth of at least 20%, and a price-to-earnings ratio of less than 12. In other words, Robert Auer’s mandate was to buy his father only companies aggressively growing and selling cheap. If the company’s sales, earnings or stock price fell outside those criteria, they were to be sold immediately. And if the company’s stock price doubled, they were also to be sold.

The strategy worked. The senior Auer, who says he always liked playing in the stock market more than doing his ‘regular’ job, apparently knew what he was doing. Over 20 years, the father-son team turned Bryan Auer’s initial $100,000 investment into $20 million. That’s because in that time frame, 765 of their stock picks doubled in price.

The returns were so good, some of Auer’s friends and associates wanted in. Among them was Bryan Auer’s longtime accountant, Scott Read.

“I’ve been doing (Bryan Auer’s) tax returns for ten to 15 years, so I know what he was making, and it was unbelievably successful. I was excited to get in on it,” Read says.

He had his chance in early 2008, when the Auers decided to take their strategy public. They launched SBAuer Funds LLC and raised $33 million. But their timing couldn’t have been worse. Within the year, the market began its worst descent since the Great Depression.

It’s not the first time the Auers have stumbled. During the tech bubble back in 1998, investors were dumping high-growth companies for technology-related stocks, depressing the prices of stocks that otherwise might have been doing well, Robert Auer says. They were down 15% that year.

“People hated ‘old economy’ companies that year. Good, profitable companies? That was so yesterday. You needed something with a Web site,” Robert Auer says.

For now, the Auers remain confident, realizing that in this market downturn, even the most brilliant stockpickers have struggled. Indeed, the fund is already up for the year. As of mid-June, the Auer Growth Fund was up 28% while the Dow Jones Industrial Average was down 0.1%.

“I’m comfortable because I know they have nothing but stellar companies in their portfolio,” says Jeff Basch, one of Robert Auer’s advisory customers from his days at Dean Witter, which was later aquired by Morgan Stanley. “I also think they do an outstanding job with research, and they’re extremely disciplined.”

Basch is obviously impressed. He has all of his money invested with the Auers.

“I’m willing to roll the dice. If I’m going to be in equities, and I am, then I think they’re the best pick,” says Basch, the CFO of IBJ Corp., which publishes the Indiana Business Journal.

So how does Auer find the companies in which his fund invests? He starts by reading every earnings report that comes out. During earnings season, just after the end of each quarter, the Auers can find themselves reading hundreds of research reports a day. If a company fits the criteria, the Auers create a 14-page dossier for it.

Robert Auer, now 48, says they’re looking for three key ingredients: How much did earnings rise in the quarter, compared to the comparable period last year, how much did sales rise, and what’s the stock’s P/E ratio.

“It’s a very unique process. I don’t know of any fund that looks at every single stock,” says Robert Auer, adding, “We buy every single stock that meets our criteria.”

Earnings growth alone isn’t a measure of future success, he notes. Auer also wants to see sales growth because any company can increase earnings in a quarter by simply cutting costs. True earnings growth comes from solid sales, the Auers say.

The real challenge, Robert Auer says, is finding the earnings and sales growth, plus a cheap share price. That can be hard to find, given that most stocks trade at an equal multiple to their growth rate, he says. Google, for instance, has growth of 25%. Accordingly, its P/E was 30.4 in June.

“So if you’re an investor, and you say, ‘I want to buy Google’ ... You have to pay for [that] growth. We refuse to do that,” Robert Auer says.

The result is that many of the fund’s investments are little-known companies that aren’t yet on the market’s radar.

One such stock is Hurco Companies, which manufactures metal bending machines. The company came out with the first computerized bending machines, which automated the bending process and enabled manufacturers to reduce their work force. The company had high enough earnings and sales and a low enough stock price that the Auers bought the stock and doubled their money, twice. Sometime after the Auers sold the company for the second time, it fell on bad times because no one was buying new equipment. The stock price fell from $40 to $2.

Everyone thought the company was going bankrupt. But when it came out with a new machine, the company once again met the Auers’ investment criteria, and they bought back in.

“When we bought the stock, everyone said the company was a piece of junk. They’re never going to survive. All we knew was their sales were up, their earnings were up, and they couldn’t make these machines fast enough,” Bryan Auer said. “The stock doubled in a month or two.”

Cal Maine Foods is another example. The Auers have bought the stock three times over because it keeps qualifying under their investment strategy. The company, one of the largest egg producers in the country, has grown rapidly because it keeps acquiring egg farms. The result is that it has grown from five million chickens to 25 million, and its stock price has risen from $4 to $40. In fact, the Auers have seen their investment in the company double, twice over, but according to their strict criteria, that’s the point at which they sell it–once their investment doubles.

It’s actually an aspect of their strategy for which they are chided. Why sell when the stock is rising? Instead of doubling your money, you can triple or quadruple it, their critics say. Bryan Auer, however, prefers a more conservative, more measured approach. Perhaps it’s something he learned from his own father, Robert C. Auer, who lived life fast but died young, of a brain aneurism. The elder Auer, a salesman for Kraft Foods, used to drive his car 100 miles an hour up and down the dirt roads around Indiana with a burger in one hand, the steering wheel in the other, and a chunk of cheese in the back of his car, as he sped from local grocery to local grocery on his sales route. But one hot summer day, he went inside and took a big swig of cold water, and his brain ruptured.

“It was probably a ticking time bomb,” said Robert Auer, who is his grandfather’s namesake. “He was hard-charging, a type-A personality.”

You can gain a lot of ground going 100 mph, but for Bryan and Robet Auer, plodding along at 60 mph is a safer bet.


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