In our opinion, thoughtful security selection, driven by a disciplined and consistently applied research process, is a reliable and repeatable way to achieve desirable results over time for our clients. Our experience, combined with our process, produces independent insight and gives us the confidence to challenge the consensus.

 

We seek favorable results by consistently and objectively applying our selection criteria to help us identify and evaluate leading companies in growing industries. We employ a systematic approach to looking at ideas. We combine fundamentally driven portfolio manager insight with a quantitative ranking process that includes quality, valuation, and momentum based factors. Decades of investing have taught us that the perception of an investment’s worth fluctuates much more widely than its underlying fundamentals. We are skeptical that short-term market trends can be predicted with consistency, so we look further out in our analysis, focusing on the key fundamental drivers that will determine investment value over the long term. As our view diverges from the consensus, we find investment opportunities. Although the public equity market tends to be efficient over time, it is possible to gain an advantage through disciplined stock selection and portfolio construction.           

 

When evaluating a company for potential investment, we find it helpful to deconstruct its ‘value chain’ from suppliers to end markets. This granular view of a business’s environment forms the basis necessary to make judgments regarding a company’s expected growth and profitability. We pay particular attention to the ‘quality’ of a company’s’ revenue growth – its consistency, the degree to which it is recurring, and the degree to which the opportunity is penetrated, etc. We seek free cash flow growth and capital discipline as much as we do earnings growth.  The combination of above average free cash flow yield and above average return on invested capital interests us. We compare our judgment of the sustainability of these key advantages with that implied by the stock’s valuation. By understanding what assumptions are required by the market, we can assess whether they are reasonable. Without this understanding, it is difficult to put news flow in the proper context and evaluate the appropriateness of market reaction.

 

We attempt to arbitrage differences in time horizons between our clients and the short-term reactionary herd approach of many institutions. As they chase short term performance, institutions can be prone to overreacting, positively or negatively, to information that has little or no bearing upon the long term prospects of a business. Our client’s time horizons are normally longer than a quarter or two, and this mismatch can create valuation anomalies that we can attempt to identify and capitalize on.