I've long been a fan of the investing philosophy, process, and awesome workplace culture at fund managers Polen Capital, and I've shared that excitement in my two previous interviews with the Polen Focus Growth Strategy team. Today I have the pleasure of interviewing Tucker Walsh and Rayna Lesser Hannaway, the portfolio managers behind the Polen U.S. Small Company Growth Strategy fund.

just a picture of some microphones

After years in the large-cap space, Polen Capital takes on small-cap investing. Image source: Getty Images.

With a launch date of March 9, 2017, the fund is just two years old at this point. In 2018, the strategy was up 3.3% against the Russell 2000 Growth Index, which declined by 9.3%. From inception through March 31 of this year, the strategy generated gross annualized returns of 18.9% while the Russell 2000 Growth Index returned 11.7%.

In this interview, we discuss:

  • why they only invest in profitable businesses
  • why they prefer to invest in consistent, durable-growth businesses, rather than the fastest-growing businesses in the small-cap space
  • their strong focus on finding businesses with ample opportunity to reinvest capital at high rates of return
  • their highly collaborative research process, which includes "blue team/red team" exercises as well as pre-mortems
  • their portfolio management strategy
  • their culture of continuous learning, which features a team investing journal and annual training supported by Polen's employee development budget

And, of course, we talk stocks, including two of my favorites, Paycom Software (PAYC 2.73%) and EPAM Systems (EPAM 2.29%). We also discuss an electronic payment provider, a couple of competitively advantaged fast-growing retailers, two market-share leaders in the healthcare industry, an automotive parts manufacturer, a sustainable decking business, and even a diet company. There's something for everyone in this interview, and there are a few things all of Tucker and Rayna's investments have in common: They only buy shares in businesses with strong balance sheets (often with net cash positions), high returns on invested capital, and a long runway of profitable growth.

Here we go!

John Rotonti: I've had the pleasure and privilege to interview Dan Davidowitz and Damon Ficklin, who lead the Polen Focus Growth Strategy fund, on two separate occasions. In those interviews, we talked about how they will only invest in companies that meet their five investing criteria, or as they put it, that "fit within their five guardrails." Does the Polen Small Company Growth Strategy also have guardrails in place, and if so, what are they?

Polen Capital: Our criteria to determine whether a company is a good investment for our strategy is virtually the same as the Polen Focus Growth strategy. We look for the best businesses in our category -- businesses that are high-quality, with the potential to sustain solid rates of growth. We specifically search for profitable companies that exhibit several years of organic revenue growth, sustained high and/or expanding margins, solid or increasing return on invested capital (ROIC) or cash-flow return on invested capital , and strong cash-flow generation -- all with manageable levels of financial leverage.

Because of where businesses in our category are in their life cycle, we do not have firm thresholds for margins and returns on capital. As small-cap investors, setting such limits could hinder our ability to identify emerging growth companies that have promising business models. In such cases, it is important to us to find businesses that have a margin structure that will allow for profits and returns on capital to rise as the business scales.

Rotonti: More than one-third of the companies in the Russell 2000 index don't generate any GAAP net income. Do you insist on only investing in companies that are profitable and generate free cash flow (FCF)?

Polen: The answer is yes, we only invest in profitable companies. We note that we are much more focused on operating and FCF than we are on GAAP net income, as there are often instances where we feel GAAP reporting fails to accurately portray the true operations of a business. We believe that in the small-cap category, the odds of finding a great company that can compound value are much higher when the company generates cash profits.

There are quite a few reasons behind this, but we think two really stand out. The first one is about growth and the duration of growth. Companies that generate cash can reinvest back into their businesses and take advantage of growth opportunities over many years. These investments in the company's future may support their competitive advantage and open new opportunities that are often only seen by skilled management teams. The second relates to risk management and is perhaps of equal importance. Companies that have cash profits do not need to access external sources for capital. This becomes very important when circumstances in the business change or if there is an economic downturn. Profitable companies are not only more successful at staying in business when this happens, but skilled management teams can use excess cash to strengthen their business during downturns. The opposite is generally true of loss-producing companies. They lack flexibility, and while there will be some that are good investments, the odds are significantly lower.

Rotonti: You have said that you generally do not buy the fastest-growing small-cap companies. Is that because of your insistence on profitability and high returns on invested capital (ROIC)?

Polen: That is true, we generally do not buy the fastest-growing small-cap companies. The reason has more to do with our desire to own sustainable and durable growth businesses that can compound over a number of years. We feel we increase our odds of doing this by focusing on above-average growers with solid returns on capital. There are some businesses that have high rates of growth and strong returns on capital in the small-cap category. They are rare and are of interest to us.

The vast majority of the fastest-growing companies in our category do not have the important cash-generation dynamic we just talked about. In fact, many must spend wildly to maintain their high growth rates. We have often found this is because their competition is fierce, or they sell to a hot market where their product is not truly differentiated and they need to run faster than the competition to take advantage of their window of opportunity.

We find that growing too quickly is not just unsustainable but can often be dangerous for many companies. Very often, it can lead to a lack of fiscal discipline, where companies overspend to drive sales growth, exposing themselves to missteps, bad hires, and a poor customer experience. Ultimately, these behaviors to maintain a rapid rate of growth lead to poor reinvestment decisions and managerial mistakes, all of which are very hard to reverse. We prefer to focus on companies where growth is more consistent and durable, driven by disciplined, methodical decisions. 

Rotonti: As growth investors, how important is it to you that the businesses you invest in are operating in a large and growing market and that their growth is powered by long-term secular tailwinds? Also, do you spend a lot of time analyzing a company's opportunities to reinvest capital at high returns? What about its culture regarding investing in growth through research and development (R&D) and capital expenditures?

Polen: We focus on companies that operate in industries where we feel there is the potential for durable growth and profitability over the long term. We are less focused on the absolute size of these industries and more focused on the unique competitive strengths and advantages that we feel position our companies well to grow and gain market share in their respective industries. Sometimes these industries are large, and sometimes they are small niche markets. Regardless of size, we always look for long-term secular tailwinds and abundant opportunities for value-creating reinvestment.

We just talked about our desire to find sustainable-growth businesses. We believe that the reinvestment piece is key to finding a long-term compounder in our category. The management team's ability to reinvest effectively back into the business will determine whether they can maintain their competitive advantage and expand into adjacent areas to sustain long-term growth. Management teams that have a track record of doing this effectively and a stated desire to do so going forward are of significant interest to us. You mentioned capital expenditures and R&D as ways to reinvest. These are important, as are effective marketing spending, sales-force expansion, and value-creating acquisitions. Understanding this is one of the most important parts of our research process.

Rotonti: Would you be able to share the ROIC, debt-to-capital, revenue growth and earnings-per-share (EPS) growth of your portfolio compared with the Russell 2000?

Polen: The following table captures our portfolio metrics relative to the Russell 2000 on a weighted average basis for the trailing-12-month period ending 3/31/2019. We included FCF growth as well due to its importance in our analysis.


Polen U.S. Small Company Growth Strategy

Russell 2000




Total Debt to Total Capital



Trailing-12-Month Year-Over-Year Revenue Growth



Trailing-12-Month Year-Over-Year Earnings Growth



Trailing-12-Month Year-Over-Year FCF Growth



Source: FactSet.   

The calculations for our portfolio are straightforward, because all constituent companies are profitable. For the benchmark, we calculated the weighted average metrics for the index in aggregate, as if it were a giant company, to include companies with negative numbers and negative growth rates. As a result, the metrics are less favorable than many published calculations that exclude non-earners and negative growers.

Rotonti: Can you discuss some other characteristics of your portfolio management strategy? How many companies do you hold in the portfolio? How do you approach position sizing? Are you fully invested, or do you have cash on the sidelines? About how many new companies do you buy each year? What is your annual portfolio turnover?

Polen: We manage a concentrated portfolio of approximately 25 to 35 holdings, where large weights can have a significant impact on the portfolio. We believe that concentration is a real advantage for us for a few reasons. First, every one of our positions is meaningful to the returns of the portfolio. Second, we believe we can limit risk in the portfolio by owning only the best companies that fit our criteria and process. We believe that it is very difficult to have a truly high-quality portfolio in this category with a lot of holdings. Finally, owning a select group of companies allows us to understand the businesses well, which is especially important when things don't go perfectly -- which does happen. Really good businesses are resilient, and many times when there is a bump in the road, we will look to add if we feel the opportunity continues to be solid.

Our position sizes are normally in the range of 2% to 8%. For new companies in the portfolio, the initial position size will depend on a few factors. If we feel the company has a wider range of outcomes in the short to intermediate term because of factors in the business, we will initiate a position in the 2% to 3.5% range to start, with the intention of potentially adding in the future. If the range of outcomes in the business appears to be in a narrower range in the short to intermediate term, and/or it is trading at a deep discount to intrinsic value, we will initiate more of a full position in the range of 3.5% to 5%. The average position size is in the 3% to 4% range.

We do always remain fully invested, with a low- to mid-single-digit cash percentage that we can use opportunistically. In the past two years since inception, we have on average initiated new positions in five new companies each year. Our turnover rate has been approximately 20% per year over that period.

Rotonti: You have a relatively small team consisting of four people. Are the analysts generalists, or do they specialize in a few sectors? Do you two share in the research and coverage responsibilities, and about how many companies is each analyst or portfolio manager on the team responsible for covering?

PolenWe are structured to do our initial research and ongoing monitoring of existing holdings in a very collaborative manner. To your question about coverage, we do not have assigned coverage per se. With a low-turnover, concentrated portfolio, each team member's workload is manageable and optimized for healthy collaboration. We have 29 holdings today and we have purchased on average five new securities each year, so we aren't talking about a lot of companies.

The portfolio managers are knowledgeable about all holdings, which is again made possible by our concentrated structure. The analysts split their time working on new ideas and existing holdings. In terms of the team structure, as you point out, we have two co-portfolio managers for the U.S. Small Company Growth strategy and two research analysts that support our research process. Each team member, including the two portfolio managers, functions as a research analyst first and foremost.

Just like the team that manages our Focus Growth strategy, we are all "business analysts." We are all generalists with no specific industry coverage. When we find a new idea that is interesting in our screening process, multiple members of the team will research the company at the same time. We work independently so that each person can form a deep understanding of the company at hand, then we repeatedly meet during the process to talk about what we have learned, to share our opinions and concerns, and come to a conclusion as to whether the business meets our definition of a great company.

As part of this process, one portfolio manager works alongside one analyst to build the investment case. Meanwhile, the other portfolio manager is learning about the company with the intention to argue the other side, in a "devil's advocate" role. We refer to this as a "blue team (reasons in favor) / red team (reasons against)" exercise. The discussion about whether a company meets our investment criteria is done over multiple meetings, with attention to points made by both the blue and red teams. The blue team will make a case for why the investment will work over our time horizon, and the assumptions that make it possible. The red team points out why certain parts of the investment case may not be achievable and develops a "pre-mortem," essentially prospectively listing the reasons the investment didn't work out.

Working through ideas this way keeps us honest and accountable in exploring all sides of a potential investment and helps us get to the "truth." We view this collaborative process as a competitive advantage to drive better investment outcomes.

Rotonti: Please discuss your research process. About how long does the team research a new idea before you have enough understanding and conviction to make a buy decision? How often does the team meet to discuss new ideas or existing holdings? Do the portfolio managers vote to determine if a stock makes it into the portfolio?

Polen: Our process has three important stages: identification of potential investments, research on the fundamentals of the companies of interest, and final decision-making.

The first stage of the process involves quantitatively screening the investment universe to filter for the key financial characteristics we described earlier. This stage of the process narrows down the universe of companies from approximately 1,500 to about 100-150. We then employ a rigorous quantitative company analysis to get an idea of the consistency of growth, margins and returns on capital. After completing this company-level screening, we decide which companies enter the fundamental research phase of our process.

As the list whittles down, we typically find 50-75 companies worthy of a "shallow dive," or the initial qualitative evaluation of a business aimed at understanding the sustainability of the growth and financials of a company, its competitive position, and whether it is in an industry possessing favorable conditions for future prosperity. If a company passes this initial review, we conduct "deep-dive" research.

As part of the "deep-dive" research, we typically review companies' publicly available information, such as conference calls, 10-Ks and 10-Qs, and other transcripts, to analyze the business, and we often have discussions with management teams to determine their growth plans and to make sure they are focused on growing the business, improving or maintaining robust margins, and reinvesting in the business in a manner to aid years of future growth. We then model the earnings power of the company and the potential for cash flow generation over the next five or more years. The key determinants in this part of the analysis are what the team believes to be sustainable levels of growth and returns on capital for the business.

We talked earlier about our collaborative process and its importance for good long-term outcomes. It is important to note that deep-dive research is performed on a team-wide basis, with multiple team members researching the same company. After we have determined that a company meets our investing criteria from a business perspective, we discuss valuation and whether it meets our hurdle of a 15% internal rate of return (IRR) over five years.

Ideally, we want to make sure everyone is comfortable investing in a new company. We do not vote; rather, we do more research on areas of disagreement among the portfolio managers. Ultimately, the portfolio managers decide what is bought and sold, and with our low turnover, the decisions are made deliberately. This whole process usually takes a few weeks to a few months, and we meet as often as is necessary. If we determine that a company meets our business hurdles but not our investment-return hurdles, or that we need to see more information before we make a purchase, we will wait to buy it at a better time or price. In some cases, we have waited as long as a year to purchase a holding.

Rotonti: Do you meet with the management teams of the companies you are investing in? How important is this to your investing process?

Polen: Meeting with management is a part of our process. We don't have a set requirement as to frequency of management team meetings, but we do meet with most management teams in our portfolio about once per year. Our meetings with management are focused on their long-term vision, the direction of the company, and the company's culture, rather than near-term results. By the time we meet with management, we have done deep research on the company and its industry and focus our questions on things that do not get fully captured in earnings-call transcripts or quarterly and annual filings. Our purpose is to determine their growth plans and to make sure we feel they are appropriately focused on growing the business, improving or maintaining robust margins, and allocating capital in a manner to aid growth.

We look for evidence that the company's success is more a function of their skillful decisions and process than it is from luck. In the shorter term, all successful companies may benefit from some level of luck or chance, but we believe sustainable growth of cash flow with high returns on capital for many years is most often a result of skill. We want to make sure that the company management teams we invest with appear to have that skill. We first look for evidence of this in the numbers, but hearing how management thinks is an important way to assess it, too.

Rotonti: Do you attend industry conferences and company investor days, and how important is that to your investing process?

Polen: We like to attend or watch webcasts of company investor days and will occasionally attend industry conferences or sell-side conferences. Our participation in each is very intentional. We do not go to investor days or conferences in the hopes of finding a great investment. We go to events like these to deepen our knowledge on companies already deemed to be high-quality, sustainable-growth companies through our quantitative and qualitative research.

Rotonti: How do you approach valuation? Do you use discounted cash flow (DCF) models? Do you use price-to-earnings (P/E) or enterprise value-to-free cash flow (EV/FCF) multiples? Do you do something else entirely? (Note to our readers: The inverse of the EV/FCF multiple is the company's free cash flow yield and FCF yield plus organic growth is often considered a good estimate of expected annualized return.)

Polen: We always focus on understanding the business first and do not do any valuation-based work until we have determined that the business meets our criteria for growth and quality, to avoid bias. If we believe a company can sustainably grow and generate attractive returns on capital, we then seek to evaluate the rate-of-return potential for the company's stock. We make our assessment of the earnings power of the company five or more years out, then look at the multiples of earnings and cash flow that it trades at today and what it could trade at in future years. Some comparative analysis is done relative to other businesses in the industry, and we consider the company's history as well.

We want the expected return to meet a 15% IRR hurdle over the ensuing five years to be considered for an initial investment in the portfolio. This means that the stock can double in five years or less. As with all Polen Capital investment team members, we subscribe to Warren Buffett's belief that "it's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." If a company meets these fundamental and rate-of-return hurdles, we place it on the buy list, comprised of a few select companies that are ready to be purchased when there is a spot in the portfolio. If we determine that a company would make a great investment, but the current price does not allow for the return hurdle, we monitor the security for a better entry point. We think that it is far more important to focus on companies that have sustainably high ROIC and that are making smart decisions to sustain their growth than it is to find companies that are trading at low absolute-valuation multiples.

Rotonti: Under what circumstances do you sell a stock?

Polen: Our goal is to buy great businesses and hold them for many years. Ideally, what this looks like is that we buy a great company at $500 million to $3 billion in market cap and sell it when it reaches $6 billion to $9 billion in market cap. This is what we consider success.

Any number of things can happen in our holding period, and we make sure to monitor risks closely. When something concerning to us comes up with one of our companies, we will do a reassessment of the business to evaluate its long-term cash-flow-generating power. If it no longer meets our definition of a great investment and/or we have something more attractive to replace it with, we will sell it and redeploy the proceeds. We want to emphasize that we think like true owners, and do not let ourselves get distracted by short-term noise.

Rotonti: Euronet Worldwide (EEFT 0.49%) has $413 million in net cash, and according to S&P Global, its EBIT margins and ROIC have both increased for five consecutive years. What does the company do, what's your investment thesis, and what is driving the increase in margins and returns?

Polen: Euronet Worldwide is a leading electronic payments provider that offers a variety of payment and transaction processing solutions. The company has three business segments -- electronic financial transaction (EFT) processing, money transfer, and e-pay -- each of which has a strong competitive position and provides its customers with a vital, interconnected network.

The EFT processing segment, which accounts for half of the company's EBITDA, includes ATM services, credit and debit card outsourcing, card issuance, and merchant acquisition services. Euronet is the largest independent ATM provider in Central and Eastern Europe, with a network of 40,000 ATMs and 300,000 point-of-sale terminals. The business earns recurring monthly management fees, transaction-based fees, and margins on dynamic currency-conversion transactions. It has generated double-digit sales growth per year for the past seven consecutive years, with total transactions processed within its networks growing at a 19% compounded annual growth rate (CAGR) over the past five years. We believe the company's EFT business still has a long runway of growth ahead of it, given the large addressable market in ATMs and the company's advantage in site selection and network effects.

Money transfer, which accounts for one-third of total EBITDA, provides consumer-to-consumer and account-to-account money transfer services, bill payment services, and other payment alternatives. The company, through its Ria money transfer products, is the third-largest player in the global money-transfer market. The global remittance industry has been growing in the low single digits, but we believe Euronet is competitively positioned to continue to gain market share, given its digital focus.

E-pay, the company's smallest segment, has been challenged in recent years because of declining sales from the processing of prepaid mobile airtime. We believe this segment is beginning to stabilize as sales from processing other forms of payment services, including gift cards, increasingly offset prepaid mobile airtime. Other services now account for two-thirds of segment sales. 

The company generates strong levels of cash flow, which management has reinvested back into the business both organically and through a variety of small strategic acquisitions. As you mentioned, both ROIC and operating margins have improved consistently over the past five consecutive years, driven by operating leverage in the business and by a favorable product-mix shift. Since 2013, Euronet's EFT segment has grown sales at a 24% CAGR -- 50% faster than the company's consolidated sales growth -- and generated strong and growing margins in the process. This has come from growth in the number of ATMs and POS terminals in its network, as well as increased transactions processed at existing ATMs and POS terminals. Over the past five years, incremental margins have remained well above current margins, leading to more than 400 basis points of EBITDA margin improvement and high ROIC and cash flow return on investment (CFROI).

We believe Euronet Worldwide can continue to grow in the mid-teens range through sales growth in the low double digits, continued reinvestment back into the business, and ongoing margin improvements.

Rotonti: EPAM Systems is a company I cover at The Motley Fool, and it's one of my highest-conviction ideas. It's a founder-led business that has a rock-solid balance sheet with $745 million in net cash. It has grown organic revenue by at least 20% for 32 consecutive quarters, and it expects to maintain 20% growth for the next several years. According to S&P Global, EPAM generated a 2018 ROIC of 13.4%, which is its highest level in three years. What is your investment thesis in EPAM, and why do you think it will be able to maintain high growth and returns?

Polen: EPAM is a company that we each have followed since it went public in 2012. The results have been nothing short of spectacular since the IPO. We believe that the company continues to be uniquely positioned in the multi-billion-dollar IT services market, with its deep software-engineering expertise, its talented labor pool in Eastern Europe, and its leadership position and enviable list of customers in the financial-services, consumer, and technology sectors.

We believe the company's emphasis on emerging technologies puts it in an advantageous position to compete for businesses in the digital-transformation space, which is the key growth driver for the industry overall; we expect this should drive continued market share gains for EPAM. We believe the company has a repeatable sales process rooted in its ability to continue to grow its business with existing customers while also adding additional customers to its client base. We also think the company is especially well-positioned to increase its business in Europe, where the market is not as penetrated and where EPAM can leverage its near-shore capabilities in Eastern Europe.

The company has a robust business model, with outstanding margins, high returns on capital, and excellent free-cash-flow conversion, despite having grown its revenue by more than 20% annually for several years. It is rare to find a company that has been able to sustain high-quality revenue growth at this pace for so many years. We like that the business is founder-led, with a management team that has demonstrated a high level of operational skill, a promising strategic vision, and strong reinvestment acumen. They have done roughly 16 strategic tuck-in acquisitions over the past 10 years to enhance their technical expertise and better position the company to grow in the future.

This is exactly the kind of value-creating investment we like to see. It is our expectation that EPAM will continue to deliver strong double-digit free-cash-flow growth for the foreseeable future, which should drive further appreciation in its share price. 

Rotonti: Globant S.A. (GLOB 1.92%) is super-interesting to me. Like EPAM, Globant is a digitally native business, so it doesn't have a legacy business weighing down its growth. And, of course, it's got many of the qualities I look for, such as a founder-CEO, decent inside ownership, a lot of net cash (nearly $86 million), fast growth, and attractive ROIC (15% in 2018, according to S&P Global). Globant has also been recognized by Comparably as a "Best Company for Culture and Diversity." Please explain what Globant S.A. does, why you like it, and how its digital business model is different from those of legacy IT service companies.

Polen: You touched on a distinction that we believe is important to make for Globant and for EPAM. For both companies, we believe their digital nativity is a huge advantage, because they are unencumbered by the slow-growing, more competitive, and less profitable legacy services that many large IT services companies still have exposure to today. In our view, IT services is a competitive, fragmented market that is subject to rapid change, and many of the largest players in the industry are being weighed down by legacy business that is declining and at risk of obsolescence. We believe the weight of this burden hinders many of these companies in their ability to innovate, recruit, and retain employees with relevant technical expertise in the digital domain, and to invest in the fastest-growing areas of IT services to enhance their capabilities.

Globant and EPAM both have a significant competitive advantage when competing with large global consulting and outsourcing firms, digital agencies and design firms, and traditional technology outsourcing providers that face these challenges. As for Globant specifically, we like it for many of the same reasons we like EPAM. The company is well-positioned in the fast-growing digital strategy consulting services industry , a market we expect to double over the next five years. Globant should be able to exceed this strong industry growth by leveraging its brand, excellent customer relationships, deep digital expertise, and scale.

As with EPAM, we especially like Globant's competitive labor advantage. They appear to have access to an unmatched pool of talent in South America, which is an important advantage given the scarcity of such resources in the IT services industry and the importance of being able to hire and retain people, manage utilization rates, and drive productivity levels in what is essentially a people business.

Rotonti: Five Below (FIVE -0.97%) is one of a few retailers you own. It looks very interesting with net cash, huge ROICs, and exceptional revenue growth (for not only a retailer but really any company). What is the company's business model, and what is your investment thesis?

Polen: Five Below is one of the fastest-growing retailers in the country. They currently operate 750 stores across 33 states, with a long runway for unit growth in the future. The stores have broad customer appeal, offer a treasure-hunt discount shopping experience that it is difficult to create online, and have compelling economics. We are impressed with management's ability to source trend-right products at attractive price points across multiple categories. They have demonstrated success across urban, suburban, and semi-rural markets, with consistent four-wall [individual] store EBITDA margins of about 25%. We find the consistency delivered across regions and by store vintage impressive. It is clear to us that they are disciplined in sticking to a very specific formula to consistently open and operate all their stores, which is the type of approach we seek in all the companies that we invest in. 

Rotonti: How is Five Below growing so quickly, and do you think it can sustain attractive growth over the next five years?

Polen: The company's growth is being driven by new store openings and strong comparable-store sales. Management has indicated they plans to grow the store footprint by 20% annually for the foreseeable future. As the company gets larger, we believe it may become difficult to maintain this pace of new openings, which we have factored into our analysis. However, we do feel confident that the company can sustain attractive growth over the next five years through the mix of new store openings and modest comparable-store-sales performance.

Ultimately, we hold the belief that the company's ability to grow is predicated on its success sourcing on-trend items at an attractive price point and of high interest to the consumer, and on management's ability to execute a smart real-estate strategy. Thus far, the company's performance in both areas has been exceptional, in our opinion. 

Rotonti: How do you think Five Below is protected from Amazon.com (NASDAQ: AMZN) and other e-commerce companies?

Polen: Five Below offers consumers a unique treasure-hunt shopping experience that consumers find to be fun. You never know what you are going to find in a Five Below store, and you often discover things you didn't even know you wanted. They offer an exciting variety of trend-right merchandise that is $5 or less across eight product types: Style, Room, Sports, Tech, Create, Party, Candy, and New & Now. The experience drives more impulsive spending, and consumers are inclined to visit the stores more often to see what new products they have. Shoppers often buy things at Five Below that they wouldn't search for on Amazon, and they make those purchases at lower prices at Five Below than similar items online.

We feel this type of shopping experience works well for kids, tweens, and teens, who are Five Below's target customers. They like to hang out in the store with their friends, checking out the cool new items, and they can fill up their baskets without breaking the bank. We believe it's hard to recreate this type of experience online -- it's not only about shopping; it's a social activity where customers delight in the unknown. We like retailers that offer a differentiated in-store shopping experience and drive value for customers. We also like the company's focus on kids, tweens, and teens, as we have both had a lot of success with companies serving this category before. From our perspective, it's a demographic that tends to be more social, economically influential, and resilient than most, especially at Five Below's low price points.

Rotonti: I have similar questions on Floor & Decor (FND -1.30%). What does the company do, and what is your investment thesis?

Polen: Floor & Decor is a specialty retailer that sells hard surface flooring. Hard surface flooring has benefited from a 15-year secular trend away from carpeting thanks to increased product innovation, better durability, easier maintenance, and hygiene concerns. We believe Floor & Decor has far outpaced industry growth levels thanks to its differentiated business model. The company offers the lowest prices on the widest assortment of [in-stock offerings], all while providing high levels of customer service and a convenient shopping experience.

Floor & Decor is able to be the low-price leader in the category because it sources all of its products direct from the manufacturer, eliminating costs associated with buying through middlemen, and then passes those savings on to customers through an everyday low-price strategy. This differs from the industry norms of opaque pricing methods based on commission sales personnel, volume-based discounts, and negotiated pricing. The company's warehouse-format stores, which average about 75,000 square feet, are significantly larger than its competitors', including the home improvement centers, which typically only allocate 5,000 square feet to flooring. This allows Floor & Decor to carry the widest assortment of in-stock products and accessories across every category of hard surface flooring.

This focus on in-stock assortment is one reason why the company generates a higher percentage (about 60%) of sales from professional customers, which by their nature are much more recurring than sales to [do-it-yourself] customers. Floor & Decor also differentiates itself by providing high levels of service, including a "Pro" app, a loyalty program, and free design consulting services for all customers.

We believe Floor & Decor has a long runway of growth ahead. The company has grown same-store sales by double-digit rates for the past 10 years and has expanded its store base at a 20% compound annual growth rate (CAGR) for the past six years. Half of the company's stores are three years old or less, and as stores mature, they generate higher levels of sales and better margins, which has led to increased profitability and higher ROIC and cash flow return on investment (CFROI). The company currently has only 100 stores, with plans to eventually reach 400. Management, which has a strong track record in the retail industry and are large owners of the business, has continually reinvested cash flow back into the business to grow its store base and improve the value proposition it provides its customers.

Rotonti: Home Depot (NYSE: HD) and Lowe's (NYSE: LOW) have much larger scale and negotiating leverage over suppliers. Can Floor & Decor compete with these leading home improvement retailers on price?

Polen: We believe that Floor & Decor can not only compete, but that they can take market share as a result of their well-executed strategy. In order to make this happen, the company adds value for its customers through a singular focus on flooring, a strategy to offer low prices, and a wide assortment of in-stock items. This enables them to convert sales to the customers that value this combination. Upon visiting one of their stores, there is a clear difference versus the large home-improvement retailers.

Getting back to price competition, one thing that isn't fully appreciated in our view is that Floor & Decor is a large player in the industry, with roughly 8% market share. This scale provides Floor & Decor with ample negotiating leverage over suppliers relative to the home-improvement centers. Even if one believes that Home Depot and Lowe's can match Floor & Decor's low prices, we believe it is unlikely they will be able to match Floor & Decor in assortment, service, or convenience. Floor & Decor is singularly focused on hard-surface flooring, whereas the home-improvement centers are designed to cater to a much wider variety of customer needs. In order to compete with Floor & Decor, we feel that home improvement retailers would need to allocate a significantly larger percentage of their store's retail space, as well as in-store personnel, to the flooring industry, which would come at the expense of other products they sell. We consider this unlikely at this point.

The competition really is the nearly 15,000 independent retailers that generate roughly 40% to 50% of industry sales. The vast majority of these independent flooring retailers source through third parties versus buying direct, and they still rely on opaque pricing methods versus providing everyday low prices. This results in prices that are on average 30% higher than Floor & Decor's. In addition, the independents carry limited assortment levels, most of which are not in stock, which can result in lead times that are several weeks long for a product to be available once a customer has ordered it. With the hard-surface flooring market highly fragmented and largely led by competitively disadvantaged independent retailers, we believe Floor & Decor can continue to gain market share going forward. 

Rotonti: Paycom Software is a company I love, because I think it's a great example of how investors don't have to sacrifice profits for growth. Paycom is led by founder and CEO Chad Richison, who owns nearly $1.5 billion worth of its shares, according to S&P Global. With a client retention rate higher than 90%, the company has grown revenue at a five-year CAGR of 39% and net income at a CAGR of about 185%. Despite heavy investments in capital expenditures, Paycom's FCF rose from $8 million in 2014 to $125 million in 2018, which equates to a CAGR of 99%; its five-year average FCF margin is 14%, and it generated a 22% FCF margin in 2018. And according to S&P Global, Paycom generated a 2018 ROIC of 32%, compared with its five-year average of 29%.

Why is Paycom able to generate such strong net income, free cash flow, and returns on invested capital when so many other highly regarded, founder-led, fast-growing software-as-a-service (SaaS) companies are generating negative earnings, and some are even showing negative cash flows? Is it something unique to Paycom's business model, or something special about the payroll and human-resources market? Is it something else entirely? (Note: I'm calculating FCF as operating cash flow less capital expenditures.)

Polen: The points you make are what has made this an attractive investment for us, and we believe the dynamic that Paycom has going for it is rare. Paycom operates in the Human Capital Management (HCM) software category. This is a fast-growing segment of the software industry, with solutions coming to market that allow companies to manage all facets of their employees' life cycle, starting with payroll and extending to many other facets of their employment. Many of the processes that these solutions replace are not automated, nor are they software-based. In the case of Paycom, they have a very good solution to add value to customers, and it is delivered in a SaaS solution, which eases setup and addition of other modules [or additional software applications sold to existing clients].

To us, the attractive part of investing in SaaS companies is the recurring revenue nature of their business model. In the HCM market, the total available market opportunity (TAM) is very large, perhaps as big as $15 billion, and historically, it grows by double digits annually. Having said that, it is highly competitive, and many companies have good solutions. What we have liked about Paycom is their unique selling model to take advantage of the opportunity in the small-to-medium-sized-business (SMB) segment. Essentially, they open new offices in major metropolitan areas and create awareness locally, enabling them to convert new customers. At the end of last year, the company had 45 sales teams in 26 states. This reach has produced a customer base of more than 20,000 clients from more than 11,000 parent organizations. Once those customers are on board, they can prove out the value of the service and add more solutions per customer. This is what drives profit and cash-flow generation.

For us, Paycom is a great investment because they are doing something unique in an industry conducive to future success. Beyond that, they have also achieved efficient conversion of sales dollars spent to new customer conversion, which has led to high retention and higher revenue per user and has made them best in class in our view.

Rotonti: Paycom is on Glassdoor's 2019 Best Places to Work list. According to Glassdoor, CEO Chad Richison has a 92% approval rating and 83% of employees would recommend Paycom to a friend (this is based on 785 ratings). Are things like workplace culture, employee engagement, diversity and inclusion, and opportunities for employee development something that you include in your research process?

Polen: We spend a lot of time considering whether the things we see today that make a business appear attractive are in fact repeatable for years to come. Culture of the organization is an important part of that. It starts with senior management and the tone they set. We like to see high employee engagement, development opportunities, and diversity. Glassdoor and other outlets can provide insight into that. We believe the makeup of the board can be telling as well. One other important thing for us, given our desire for companies that generate profits and cash, is a commitment to growing the business profitably. We find that this commitment is often driven by the culture of the organization. In this case, Paycom has been committed to growing profitably and the results have been outstanding, both for the business and, as a result, for the stock.

Rotonti: I think the market recognizes how truly special and unique of a company Paycom is, because it trades at very high multiples. According to S&P Global, it trades at an enterprise-value-to-forward-revenue multiple of 15 and at a next-12-month P/E ratio of 58. What is your long-term thesis, and do you think Paycom can maintain the high growth necessary to justify these high multiples? 

Polen: The stock trades at a premium price relative to the overall market and has had that distinction over the past several years. We just outlined how the company is uniquely positioned, has a repeatable sales process, generates robust earnings and cash flow, and has highly effective management with a successful record of reinvesting into the business. These are the kind of businesses that we actively seek out as investment candidates and most of the time, they trade at premium valuations. What we feel makes them good investments going forward has more to do with the ability to maintain or expand their growth rates and returns on capital.

In this case, we believe that the addressable market is quite large, and when you consider that SMBs are more than half of the U.S. workforce and penetration into that segment is still low, the backdrop is quite good. It is not hard to imagine a high penetration of software solutions to manage employees' life cycles, and the solutions are becoming more robust each year. With its unique selling model and premier execution, Paycom appears well-positioned to grow revenue from new customers. Add to that the dynamic of selling more modules to existing customers, and we think this sets them up very well to grow the top line. Today, the company's levels of profits and cash are high and expanding, the combination of which we believe makes Paycom an attractive business to own for the foreseeable future.

Rotonti: Fox Factory Holding (FOXF -0.59%) is another company that I have very high conviction in. It's got modest net debt, but it's growing rapidly, and according to S&P Global, its gross margins, EBIT margins, return on assets (ROA), and ROIC have all increased for three consecutive years (2016-2018). Please tell our readers what the company does and explain your investment thesis.

Polen: Fox Factory is a leader in the design and development of high-performance shock absorbers and racing suspension products for mountain bikes, motorcycles, snowmobiles, ATVs, UTVs, off-road cars, trucks, and SUVs. The company describes itself as being focused on making its customers' vehicles perform better. Their premium ride products allow customers' vehicles to go faster and farther, ride safer, last longer, and have better control, making Fox a strong brand for professional athletes and enthusiasts. The brand is aspirational, and customers began to specifically ask for a Fox product to upgrade their experience. Now, the company has been included in new product introductions on an original equipment (OE) level thanks to their higher level of performance quality. The mix is fairly balanced in these channels, and additional products that they acquire or introduce mostly start in aftermarket and expand to OE.

We like this company a lot because it fits all the things we want in a great investment. First, we believe Fox is uniquely positioned in a growing market. We feel their strong brand and the superior performance of their products is their competitive advantage. The sales process is repeatable thanks to demand from customers that specifically want Fox products to upgrade their ride experience, and from demand out of large OE manufacturers such as Honda, Polaris (NYSE: PII), Ford (NYSE: F), and many others.

The company is very profitable and generates a lot of cash. Their margins and returns on capital are strong and have been rising, which we believe is evidence of a skilled management team. We think management has done a very good job of reinvesting back into the business by adding new products and investing in additional capex. These investments have resulted in complementary growth opportunities, which have expanded the company's total available market opportunity and have resulted in an acceleration in their growth rate. We like to think of businesses that are run this way as being on a flywheel, with that dynamic setting them up to be multiyear compounders.

Rotonti: What has been driving the increase in margins and returns at Fox Factory Holding?

Polen: We believe that reinvestment by the management team over several years is at the heart of the increases in margins and returns. Effective reinvestment is very important to us, because we feel it is necessary to maintain levels of profitability, and if it's done right, it can maintain or accelerate the growth of the business.

Fox Factory has compounded revenue growth at 18% over the past seven years. Recently, revenue growth accelerated to 30% in the latest 12 months. We believe the key contributor to that growth is the increased breadth of product offerings that have been steadily rolled out over the years. These results have been baking for some time thanks to solid and consistent execution by the management team. Specifically, the company has seen impressive demand for their solutions in the powered vehicles segment, with high demand for their on- and off-road suspension products and accessories. This success has been incremental to strong demand in adjacent categories, such as side-by-side vehicles, and opens future possibilities in other off-road capable offerings.

The combination of these factors has had a resulting increase in the revenue growth rate, and by leveraging fixed costs, a nice increase in margins and returns. From these levels, we feel there could even be more expansion through operational efficiency initiatives that the company has publicly committed to, such as optimizing bike production in Taiwan and improving processes through a new ERP system. We also expect more value-producing reinvestment by the management team to drive even better results over time.

Rotonti: You own several healthcare-related companies, but I'm particularly intrigued by Masimo (MASI 0.58%). The founder and CEO, Joe Kiani, owns more than $500 million worth of Masimo stock, according to S&P Global. Masimo also has $553 million in net cash, generated a five-year (2014-2018) average ROIC of 17%, and is growing at a nice rate. What does Masimo do, and what is your investment thesis?

Polen: Masimo is a medical technology company that develops, manufactures, and sells non-invasive monitoring devices. Joe Kiani's vision and mission from the company's founding was to improve patient outcomes and reduce the cost of patient care. This began with the company's core product: the Masimo Signal Extraction Technology (SET) pulse oximetry. The technology behind SET was a breakthrough at the time, enabling measure-through motion and low perfusion pulse oximetry. They now have mid-40s percent market share in pulse oximetry, a $1.6 billion market, with opportunities to grow share over time. The success of SET and skillful reinvestment by the management team has enabled a significant expansion of product offerings in the ensuing years. Now, the company offers a broad array of other non-invasive products and is offering solutions that integrate systems and monitoring solutions together to improve quality of care. This has expanded their total available market (TAM) to close to $6 billion.

Masimo has all the elements that we look for in a multi-year investment. We view Masimo's products as uniquely positioned within an attractive industry backdrop, since sales growth in the 8% to 10% range seems achievable for several years to come and the company has robust margins that can rise and it generates a nice amount of cash. Management has also proven to us to be quite skilled in reinvesting in new product development, which we feel will enable the company to maintain a lead and expand into adjacent markets for additional growth.

Rotonti: What are Masimo's competitive advantages that enable it to generate such attractive returns on invested capital?

Polen: We believe that Masimo's competitive advantage lies in the company's technology -- it is much better than the competition. In our view, these kinds of companies are hard to find in our category, as competition usually narrows this kind of lead. The outcomes from the use of SET pulse oximetry were dramatic enough to drive widespread adoption and establish an industry-leading market position. Over a number of years, the company has had to defend its patents and has prevailed, leading to partnerships or royalties as a result. The company has wisely reinvested back into expanding its presence into adjacent categories where their technology improves patient outcomes, allowing them to grow and maintain high returns on capital.

Rotonti: According to S&P Global, Masimo's EBIT margin jumped from about 18% in 2015 to more than 23% in 2016. What drove this 500-basis-point increase in the company's operating margin, and is this higher-margin profile sustainable?

Polen: The operating margin has increased at an average of about 120 basis points per year for the past five years. The improvement has been driven by leveraging both research and development (R&D) and selling, general, and administrative expenses (SG&A).

There are a few things happening at the operating-margin level in the short to medium term. Royalty revenue that had been coming from Medtronic (NYSE: MDT) ended last year, which we believe is a drag. However, the company is very confident in their ability to expand margins from here as the newer products gain traction and a significant partnership with Philips accelerates. When comparing the product operating margin year over year, the company sees improvement in 2019 and beyond. Their long-term target is in the 30% range from the 22% or so level today. So we feel that in the longer term, yes, it is sustainable, but it may flatten before increasing due to the royalty decrease.   

Rotonti: In the healthcare space, I'm also very interested in learning about Inogen (INGN 0.11%). What does the company do, and what's your investment thesis?

Polen: Inogen is a company we had been watching for over a year that we were able to opportunistically start buying at the end of 2018 when the stock came under significant pressure. The company is the leading provider of Portable Oxygen Concentrators (POCs), a product that enables a major upgrade in lifestyle for patients who suffer from Chronic Obstructive Pulmonary Disease (COPD), which is the third leading cause of death in the U.S. behind heart disease and cancer. The treatment of severe COPD cases has historically been delivered in the form of large tanks of oxygen typically used in the home or a hospital, weighing more than 150 pounds and requiring regular refills of liquid or compressed oxygen.

Inogen is the 50% market share leader in the smaller-form-factor portable devices, which allow patients to get out of their houses and even travel because they weigh only a few pounds and source oxygen from ambient air in the room -- they never have to be plugged in or refilled. Sadly, most COPD customers have a severe enough form that they are near end of life and seeking an upgrade to quality of life for their remaining years. This is what is driving rapid penetration of these portable oxygen concentrators (POCs). The market is competitive, but Inogen's products are considered the gold standard, and the company has a differentiated go-to-market model where they sell directly to consumers that has proven to be very successful.

We believe the company can deliver well-above-average sustainable growth for several years. We also believe that Inogen has an attractive margin structure and is a strong cash generator with excellent reinvestment opportunities.

Rotonti: Inogen is growing very fast. What is driving that growth, and do you think it can maintain attractive growth over the next five years?

Polen: We estimate that growth in POCs will be driven by growth in COPD and more effective diagnoses, which together is 7% to 10% per year historically, plus penetration increases as portable devices replace older tanks. Inogen's management estimates that POCs could ultimately take 65% share of the ambulatory COPD population, up from just 10% to 15% today. This shift, which appears to be accelerating, is the largest driver of Inogen's growth.

Beyond the convenience of POCs, another important driver of this acceleration is that there is less favorable oxygen tank reimbursement for home medical equipment providers combined with increases in their operating costs. As traditional oxygen tank margins compress for the providers, making the traditional oxygen delivery model less sustainable for them, they are increasingly likely to adopt and provide POCs, too. 

Rotonti: What are Inogen's competitive advantages, is it protected by high barriers to entry, and does the company face lots of competition? I'm just trying to wrap my head around why the portable oxygen business is so attractive.

Polen: Inogen's competitive advantage to date has been in the form of better technology. Its most recent POC model is one of the smallest, lightest, and quietest POCs on the market today. Inogen continues to stay ahead of its competitors through ongoing research and development innovation. They are pressing this advantage by creating more demand by selling directly to consumers. We believe this unique go-to-market model is also a competitive advantage for the company. Other manufacturers solely rely upon selling to home equipment providers, many of whom continue to service oxygen patients through the tank delivery model because they have heavily invested in its infrastructure. While Inogen's competitors could ultimately pursue direct-to-consumer models too, we do not believe they can easily make this shift.

Rotonti: I've never researched companies in the diet sector, but it seems to me that several diets are fads that come and go as new products enter the space. In other words, at first glance, I don't think the industry is protected by high barriers to entry or wide moats. But Medifast (MED -1.67%) has fantastic financials! It has $100 million in cash and zero debt. According to S&P Global, its gross margins, EBIT margins, and ROIC have all increased for three consecutive years (2016-2018). Also, according to S&P Global, over the past five years, Medifast generated an average ROIC of 27% and grew revenue at a 9% compounded annual growth rate and EPS at a 19% CAGR. Please explain why Medifast is able to generate such strong business economics and growth rates.

Polen: The diet market is an enormous market worldwide that continues to grow and never goes out of style. Customer demand is high for products like these, especially with skyrocketing rates of obesity throughout the world. We agree that the industry does not have high barriers to entry or wide moats, but we also think there is room for many players to be successful since the market is so large.

Medifast has been in the diet business for a long time but has undergone a major transformation in the past couple of years. The company has focused its business on its Optavia brand, with a coach-based, direct-selling go-to-market strategy. This has proven to be a huge success for them and a real game-changer for the company's financial model, driving faster growth, better margins, and better ROIC. We really like the asset-light nature of the coach-based model and coaches' ability to leverage social media to promote the Medifast brand. We are impressed with the recent improvements in client duration and coach productivity, both of which are helping to drive a more repeatable sales process for the company.

With over 60% growth in the past year, they are gaining share in this large and attractive market with a brand and go-to-market model that appears to resonate with consumers. It is exciting to see Medifast begin to expand internationally, where most direct-selling businesses have historically achieved even more success than they have in the United States. We believe that Medifast will be able to double its business over the next three to four years by more deeply penetrating the U.S. diet market and through successful entry into selective international markets with its proven Optavia brand and coaching model.

Rotonti: Pool Corporation (POOL 3.48%) seems to fit your investing criteria, with a five-year average ROIC of 24%, a five-year revenue CAGR of 7.6%, and a five-year EPS CAGR of 22%, according to S&P Global. But Pool has higher levels of debt than many of the companies in your portfolio, with net debt of about $650 million and a debt-to-capital ratio of 75%. Also, its free cash flow is not growing as fast as net income and its five-year (2014-2018) average FCF-to-net income ratio (or FCF conversion) is only 76%. What is your investment thesis in Pool Corp., and do the growing amounts of debt and net debt or the slow FCF growth concern you at all?

Polen: Pool Corp is the world's leading distributor of swimming pool equipment, parts and supplies, and other pool-related products. We have known this company for some time, and the reasons we like it as an investment are consistent. We feel they have a strong competitive advantage as the leader in their category, their scale now makes it more prohibitive than ever for potential competitors, and their sales process is extremely repeatable. They enter a market with a decent-size distribution center, attract local customers who are mostly professionals in pool maintenance, and sell more to those customers by satisfying their need for quick fulfillment of inventory. Market share is taken from small mom-and-pops, and once they establish a presence, they may expand to another center close by for additional convenience. This has produced 8% compounded revenue growth for eight-plus years now.

The company produces robust margins and returns on capital, which have crept up over the past several years as operations and fulfillment have gotten more efficient. Management has proven to us that they are very skilled and have a repeatable formula, with thoughtful reinvestment keeping growth at that 8% range and initiatives -- including online ordering and more efficient turnarounds for professional customers -- driving higher revenue per transaction. We believe they are also very skilled when it comes to capital allocation. They have opportunistically bought back shares over the past eight years, and the share base has shrunk to 42 million shares outstanding from 50 million eight years ago.

Part of their formula over time has been the consistent use of some leverage. The levels have remained consistent and are less than 2 times net debt to EBITDA. As for free-cash-flow conversion, we believe the lower conversion recently was just a timing issue. Their suppliers have increased prices, and to get ahead of it, the company bought more inventory before further increases. Pool Corp. had been slow to raise prices themselves, but they completed increases for most products in the second half of 2018, so we would expect FCF to exceed net income in calendar 2019. Pool Corp.'s consistent formula for growth with a moat that is stronger than ever makes this a high-conviction holding for us. 

Rotonti: My colleague Alyce Lomax and I like Trex (TREX 4.04%) partly because of its environmentally friendly composite decks and manufacturing processes. Here is what the company writes in its annual report: "Trex's eco-friendly composite decking products consist of a blend of 95 percent recycled wood and recycled plastic film. Trex uses locally sourced reclaimed wood that would otherwise end up in a landfill. An average 500-square-foot composite Trex deck contains 140,000 recycled plastic bags, which makes Trex one of the largest plastic-bag recyclers in the United States. In addition, Trex's proprietary, eco-friendly processing method eliminates the use of smokestacks, and our bi-coastal factories reduce fuel consumption and CO2 emissions. Almost 100 percent of our factory runoff and refuse are recycled back into the manufacturing line." Do you typically examine a company's environmental, social, and governance (ESG) profile as a part of your due diligence process?

Polen: Yes, we do take ESG into consideration in our research process. When we do research on a company, it is important to understand what they do and how they do it. Our preference is to invest with management teams that prioritize these factors, and as we mentioned before, each company's corporate culture is important to us.

Rotonti: Trex also has leading market share, $106 million in net cash, and stratospheric returns on equity (ROE), ROA, and ROIC, not to mention a five-year revenue CAGR of 15% and EPS CAGR of 35% (according to S&P Global). Do you think Trex will be able to gain even more market share and maintain high returns and attractive growth over the next five to 10 years?

Polen: We believe so, yes. You pointed out how impressive their growth and returns on capital have been. When you look at the penetration of non-wood decking, there appears to be a nice opportunity to increase penetration going forward. The penetration increases to date have been reasonably consistent, and we believe the value proposition is there. In this case, the growth has been strong but not explosive. We believe that this makes it more likely that they can continue to grow and generate nice amounts of cash for quite a while. As we discussed earlier, very high rates of growth can look appealing, but they are hard to maintain for long periods.

We think Trex is a well-run company where, like all our other investments, its management team does a very good job reinvesting back into the business. In our view, the brand that they have built, plus the buildup of cash over the last several years, puts the company in a great position to expand beyond their current product set if they see opportunities. They have already expanded their product offerings to include ancillary products, and there could be other opportunities. We expect this to be the case and believe it will be a good investment going forward.

Rotonti: Is there anything else you'd like us to know about the Polen Small Company Growth Strategy?

Polen: Throughout this interview, we have talked about our collaborative research process and disciplined focus on investing only in high-quality companies, each of which we believe are key competitive advantages for our team and for all the investment teams at Polen Capital. Continuously improving our skill in every facet of what we do is another incredibly important pursuit that we believe is a competitive advantage. We hold ourselves to the same standards that we hold all our companies to as it relates to reinvesting in our own skill sets, which we do through continuous learning.

Keeping a team decision journal is one of the ways we embed continuous learning into our investment process. Whenever we're making a consequential decision, such as something going in or out of the portfolio, a large trim or add, or passing on a company, we write down what we expect to happen and why we have those expectations in an effort to prevent hindsight bias. This can help us collect accurate and honest details on what we were thinking at the time we made the decision and will help us see if we are making good decisions. We believe having this feedback will help us make better decisions over time.

Another thing that each member of our team does to continuously learn is to attend training courses. Everyone at Polen Capital establishes annual training goals and has an annual professional development budget to pursue trainings across multiple disciplines. We are incredibly lucky to be surrounded by a group of like-minded learners and to be part of a firm that so strongly supports continuous learning. Continuous improvement is one of the unique parts of the great culture we have here at Polen Capital.