Concentrated Value
Fundamentals Over Valuation
- In contrast to many value investors, we take an earnings-centric approach to investing. We invest only in companies where our view of the earnings potential of the business is well in excess of market expectations.
- We look to have a sufficient margin of safety in the event our forecast proves incorrect.
- We are sensitive to valuation, but it is not the basis of our process. If we are right in anticipating positive earnings revisions, the multiple will take care of itself.
Concentration & Conviction
- We believe a concentrated portfolio of stocks we understand extremely well provides superior risk-adjusted returns.
- Investing in situations where we have a high degree of conviction enables us to exploit periods of market dislocation even when it feels uncomfortable.
- Not interested in mimicking an index.
Quick to Admit When Wrong
- Given even the best of managers are wrong ~40% of the time, we have built a culture and process oriented at identifying and remediating our mistakes as quickly as possible.
- Avoiding thesis creep: at inception of a position, we identify the most important KPIs for our thesis and actively test them against emerging information. When a thesis shows signs of strain, we trim/exit and move on.
- Analysts are encouraged to constantly question their thesis and actively surface disconfirming information.
Intellectual Honesty
Intellectual honesty is at the core of our process, whether underwriting new investment opportunities or evaluating new information on existing positions.
Process-oriented
Adherence to process is critical. During times of crisis, time horizons compress yet that is the exact time they should expand.
Differentiated Long-term Thinking
As long-term investors, developing a deep understanding of the industries and businesses in which we invest is paramount, but it is not sufficient.
Conviction
We believe a concentrated portfolio of stocks we understand extremely well provides superior risk-adjusted returns.
Favorable Fundamentals
- Favorable long-term secular trends
- High perceived value to customer base (latent pricing power)
- Sustainable competitive advantage (unique IP, scale, low-cost producer, network effects)
- Strong management with aligned incentives
- Sound and transparent capital allocation strategy
Financial Quality
- Stable/improving RoIC in excess of WACC
- High net income to free cash flow conversion
- Efficient capital structure
- Conservative accounting practices (non-GAAP adjustments, capitalized expenses, etc.)
Forecastable
- Business model within, or near, our circle of competency
- Key drivers are idiosyncratic; not overly dependent on macro factors
- Our outlook is materially different than consensus
- Valuation attractive relative to growth outlook
- Comfortable owning for years
Public Filings
10-Ks, 10-Qs, proxies, conference transcripts.
Third Party Research
Trade publications, industry conferences and events, sell-side research.
Industry Stakeholders
Interact with management, customers, suppliers, competitors, former employees.
Financial Analysis
Financial modeling with focus on the most important 2-3 key drivers.
Valuation
(P/FCF, P/E, EV/EBITDA, etc.) to quantify risk/reward.
Expectations
Understand consensus expectations embedded in price and how our thesis & forecast may differ.
Each investment has an upside, downside and worst-case scenario that generates a probability-weighted return (PWR) profile.
Additional qualitative factors are evaluated and given scores such as Conviction, Business Quality, Management Quality, Timeliness and Leverage.
We assess PWRs and qualitative factor scores in determining optimal position sizes, removing the emotional element that for many leads to suboptimal sizing decisions.
Position Size Discipline: Maintain a disciplined approach with a maximum position size of 8% at market and a minimum of 2%, ensuring prudent allocation of resources.
Continuous Downside Focus: Foster a continuous dialogue on “what can go wrong?” to proactively identify and address potential downside risks.
Factor Exposure Analysis: Rigorously analyze factor exposures to remain vigilant against unintended risks at the portfolio level, ensuring a well-balanced strategy.
Margin of Safety: Incorporate a sufficient margin of safety, allowing room for adjustments if market forecasts prove incorrect, mitigating potential losses.
Quarterly Risk Reviews: Review factor exposures, scenario analyses, performance attribution, and liquidity with Risk Management Committee.