OUR INVESTMENT PROCESS

Our Investment Process

Our investment process focuses on firms trading in the bottom quintile based on price-to-book valuation. Investment candidates with transparent accounting, strong balance sheets, high current cash-flow yields, active share repurchasing, active insider buying, or evidence of improving economic dynamics are typically preferred for additional study.

We evaluate the attractiveness of stock valuations in the context of capital structure leverage.  We don’t maintain a set limit on leverage as different businesses can be safely leveraged to different levels at different times in the economic cycle.  We generally focus on companies with debt levels that we judge to be manageable and well-termed.  When we consider investments in companies with high debt loads, we work to ensure that we are well compensated through highly discounted valuations for the capital structure-related investment risk incurred. 

Our typical process involves thoroughly researching the business and industry, making use of all available information.  We review company presentations and common regulatory filings, as well as study recent conference call transcripts and sell-side research.  We also spend time reading trade publications and attending investor and industry conferences to better understand recent industry dynamics.  

Once we have identified a possible investment candidate, we perform a deep-dive, bottom-up analysis of the business.  We evaluate cyclical/secular trends, competitive dynamics, and sources of operational or financial stress.  We focus particular attention on the balance sheet, marking assets to market and making any liability adjustments.  We build our own models, with particular attention to the researchable, non-financial metrics that most directly impact business profitability and cash flow.

Based on interviews with managements, channel checks with other industry participants, and evaluations of prior management decisions, we assess management’s capabilities, ethics, and capital market discipline.  We contemplate the investment in the context of agency risk, particularly with smaller companies that have a limited institutional investor base. Finally, we attempt to determine normalized cash flows 2-3 years out and estimate intrinsic value as a reasonable multiple of these cash flows.  We typically invest when we can buy at a sufficient discount to that value, particularly when we see potential near-term fundamental catalysts for the market to change its view.

Once we initiate on a position, we monitor the investment regularly, evaluating quarterly results, assimilating new information, and developing an understanding of emerging trends. We maintain frequent interaction with our portfolio companies, regularly speaking with the management teams with an eye out for changes in key assumptions underlying our investment thesis. Finally, we reevaluate ‘winners’ as they approached our price targets.