Value Investing

Our investment process combines macroeconomic themes and general market analysis with a bottom-up approach which emphasizes security selection based on our fundamental research.

Macro Views and Bottom-up Approach
Our macro views of the economy and the overall market influence our asset and sector allocations. We construct our portfolios through the selection of individual securities in the attractive sectors which meet our value criteria. As value investors we tend to be contrarian, investing in undervalued companies that are temporarily out-of-favor but misunderstood, or that are under-followed and lesser known. We then patiently wait until the market realizes their true values.

We encourage prospective clients to review our past quarterly letters, all of which are available on our website, and which provide an historical overview of our economic and market views, and our investment strategies, over time.

Fundamental Criteria
Our main fundamental criteria for value include:

• good business franchise
• consistent earnings and prospects for earnings growth
• low price relative to our appraised Fair Market Value (FMV)
• expectation for significant growth in FMV
• free cash flow generation
• efficient balance sheet, i.e., optimal use of debt
• high return on capital
• strong management team
• competitive market position
• potential catalysts to realize shareholder value
  

Fair Market Value
We calculate a security’s intrinsic value or FMV based on earnings and cash flow expectations, prevailing and anticipated interest rates and profitability relative to the company’s net worth. FMV is based on the present value of the company’s cash flow return on capital above its cost of capital, plus fixed assets and net working capital, less all debt. We also compare our computed FMV to private market valuations, i.e., what a potential acquirer would pay for the entire business.

Short Selling
For long/short accounts we can short sell stocks which are overvalued relative to their FMV and/or have poor or deteriorating fundamentals, such as an overleveraged balance sheet, diminished growth expectations and/or a low return on capital. Short selling potentially enables us to realize a return, but also to hedge or insulate our long positions in down or volatile markets.