Our investment process can be broken down into four steps. 

 

Market Analysis

We take a broad view of the market and economy, which informs our determination of how aggressive or cautious to be and which sectors and industries to focus on. 

 

Sector Analysis

Sector selection is based on considerations such as macroeconomic and market analysis, competitive dynamics, trend in capacity, valuation, sentiment, management behavior, substitutability, growth potential, and market anomalies. 

 

Quantitative Analysis

This includes a company’s valuation metrics (such as free cash flow yield, price/earnings, price/sales), as well as various aspects of the company’s financial statements, such as how it is deploying its capital, trends in its capitalization structure, and its profitability. 

 

Qualitative Analysis

We assess the fundamentals of the company’s business, generally favoring those with barriers to entry, pricing power, network effects, limited competition, lock-in effects – attributes that create sustainable competitive advantages. Often we invest in such companies when they are out of favor for short-term reasons. 

 

We are looking for stocks in which there is a favorable gap between market price and what we estimate as fair value.  This is often defined as value investing, but we frequently venture into traditional growth stocks if the situation is right.  We are just as willing to consider a company with a great growth profile as we are a lowly valued one, as long as the price is appealing. 

 

In this profession, the expectations that are embedded in the price of a stock are extremely important - a fact that we believe is regularly forgotten or just plain not understood.  It is revisions to expectations that determine how a stock performs, whether that be through a lowly valued company’s business becoming less bad or a well-positioned juggernaut gradually earning the respect of the market through its consistent growth.  The future is unpredictable, and the potential range of outcomes tends to be underestimated.  Given this, and given the important role that embedded expectations play in the performance of a stock, it seems wise to us to gravitate toward situations in which the risk-reward appears to be positively skewed.