Philosophy
We pursue a strategy of evaluating companies, rather than stocks – a process that leads to better and more methodical long-term decision making. We appraise companies as a potential owner-operator focusing on firms with an understandable and consistent business model as well as proven performance and future business growth potential. We seek out companies whose stocks are inexpensively priced relative to their history and interest rates – not just the market. We build equity portfolios with our 40 to 50 best ideas.
Fundamental Value
We seek investments in businesses offering fundamental value. Our initial investment universe includes all companies greater than $1 billion in market capitalization. To better focus our research, we identify those companies that we consider to be of the highest quality, with understandable and consistent business models, typically including companies with above-average returns on capital and equity. We appraise companies as a potential owner-operator looking for managements that enhance shareholder value. We eliminate those companies that have unpredictable business models.
We use three different valuation methodologies as a cross check of our assumptions. We conservatively forecast future growth estimates, valuation multiples and discount rates in order to establish conservative buy/sell targets. We wait patiently for stocks to reach our buy targets, which are set at levels that reflect a minimum expected three- to five-year annualized total return of 15%. We constantly refresh our analyses and adjust buy and sell targets for companies we hold in our portfolios.
To maximize the potential benefit of our stock selection skills, we create equity portfolios with the 40 to 50 best companies, diversified by sector and industry. With our long-term perspective, the annual portfolio turnover tends to be quite low. This aids in lowering transaction costs and increases the potential long-term, after-tax returns.