SMALL CAP

Competitive Performance With Lower Risk

The primary objective of our investment process is to assemble a portfolio of stocks with market capitalizations between $50 million and $3 billion that potentially will return a 30%+ annual rate of return over a three year period of time.

We believe we can consistently accomplish this with an investment process that combines a rigorous fundamental analysis with a disciplined valuation approach. Our approach consists of a stock selection process comprised of two distinct exercises-fundamental analysis and valuation-which is integrated into a diligent portfolio construction process.

RIGOROUS FUNDAMENTAL ANALYSIS

Our stock selection process begins with a series of screens, sifting through a variety of financial and other characteristics, which produce a pool of potentially investable candidates that merit further investigation. The universe within which we screen includes all North American publicly traded companies, as well as those foreign companies that trade ADRs, having a market capitalization that falls within the range of the smallest and largest cap companies included in the Russell 2000 Index. Otherwise, the screens are not focused on any particular industry sector – they are designed to capture the broadest possible universe of qualifying companies fitting specified financial characteristics.

The analytical process then starts with a thorough review of a particular candidate’s SEC filings, from which we validate the financial attributes found in the screens and expand our understanding of the company’s underlying business and financial characteristics. We then often conduct interviews with company management to discuss their operations and gain further insight into issues identified as critical to the company’s success. We may also conduct field research, contacting the company’s suppliers, distributors, competitors, and customers. At times we may also deploy independent analysts to conduct this type of analysis (i.e. channel checks, customer interviews) and may also speak with Wall Street securities analysts to obtain their views of the company as well as to better understand any “institutional” bias that may exist.

DISCIPLINED VALUATION APPROACH

From this fundamental analysis we develop our own model of the company’s business, the result of which is a multi-year forecast of earnings and cash flow that drives our valuation model. We derive an estimate of a stock’s fair value, or price target, using a discounted cash flow (DCF) model, as well as estimating an appropriate multiple of earnings, cash flow, or book value at which a stock should trade relative to the market.

Typically, stocks included in the portfolio will have an expected annual rate of return-derived using our price targets as described above-of at least 30% and are expected to produce that return over a 18-36 month timeframe. We also seek investments that have an asymmetrical distribution of expected upside return versus downside risk.

DILIGENT PORTFOLIO CONSTRUCTION AND MANAGEMENT

Both portfolio holdings and potential investments are frequently sorted and ranked according to their expected rates of returns. Conceptually, portfolios are built by owning those stocks with the highest rates of return over the relevant investment time horizon, and methodically replacing those in the portfolio having relatively low expected rates of return with well-researched ideas having higher expected rates of return.
A series of variables are considered when determining the size of an investment in any security:

  • Expected rate of return
  • Symmetry of returns
  • Quality of management
  • Quality of balance sheet
  • Liquidity

Positions are reduced or closed out under four conditions:

  1. A security’s price target is achieved
  2. More attractive, higher expected return ideas are available
  3. Portfolio limitations are such that a sale is warranted
  4. New information comes to light which causes us to reconsider our underlying investment thesis
Slogan: 
Competitive Performance With Lower Risk