Our investment philosophy is grounded in a top-down, sector based approach. Each analyst group is responsible for a specific sector (or sectors), based on the Global Industry Classification Standard (GICS) sectors. Analyst groups work to determine the viability of each sector over a five-year period, and focus on the best mid- to large-cap companies in each sector.
Analysts begin by examining their specific sector. We evaluate sectors based on several macroeconomic factors. These include, but are not limited to, the following shown in the chart to the right.
Qualitative analysis of these factors on individual corporations’ operating business models provides fertile ground for proper assessment of the future earnings and returns. We evaluate our common stock investments in the same way one would evaluate the purchase of an entire business: by looking for understandable, well managed, and competitively advantaged businesses at prices below their value to a private owner.
Analyst groups next move to finding undervalued stocks in their sector. We seek to invest in companies that we believe are undervalued at least 15%; have strong cash flows, consistent earnings and a proven business model; and are expected to outperform the S&P over a five-year span. Analysts combine Free Cash Flow valuation, financial ratio analysis, and business model analysis to determine the quality of investment options. Investment metrics include, but are not limited to the following shown in the chart on the left.
The analyst groups also focus on risk in its various forms, including:
Business Model Risk – the avoidance of unstable or uncompetitive business models.
Balance Sheet Risk – the avoidance of companies with unsuitable leverage.
Management Risk – the avoidance of poorly managed companies.
Valuation Risk – the avoidance of companies selling at an inflated price in relation to a reasonable range of true business value.
Obsolescence Risk – the avoidance of businesses with a product or service subject to rapid change or obsolescence.
Aggregation Risk – the avoidance of a common stock portfolio with highly correlated business risks, i.e. a portfolio of company’s subject to interest rate risk, similar investment risk, or commodity risk.
When combined and properly vetted, both quantitative and qualitative approaches yield a well-diversified portfolio of investments intended to outperform the S&P over a five-year horizon.