Portfolio
Management Process


 

Stock Selection Process
Our search begins with the formation of a Research Universe for our Small Value Portfolio
.

We then engage in a disciplined and repeatable investment selection process encompassing Quantitative Selection and Qualitative Research.

Quantitative Selection
We run proprietary quantitative screens across all public companies. These screens identify US-traded, reasonably liquid, small capitalization investment candidates exhibiting Four Elements for Performance - attributes we have found in common with our most successful investments.

  • Underperforming
    We seek a company that has suffered from negative overreaction resulting in a collapsed price relative to the market and its peers. The stock's cumulative total return has underperformed the Russell 2000 Value over the last three years. The result: an overly pessimistic investor outlook and a company that is virtually ignored out of all proportion to its real long term outlook and value.
  • Low Valuation
    We seek a company selling at low Price/Intrinsic Value; at low Price/Normalized Earnings and often at low Price/Asset Value dampening downside price risk through a margin of safety. Many investors are Buy high-Sell Higher investors. They gain emotional comfort and confirmation of their investment insight in a rising price. We are true Buy Low-Sell High investors. We gain comfort from a Price wholly supported by Value and confirmation of our investment insight from business performance; a price level that indicates a stock’s best returns may lie ahead. 
  • Financial Strength
    We seek a company that exhibits good Financial Strength, an indication of an economically viable business model that can generate sustainable profits. Academic research and  empirical experience suggest that measuring Financial Strength enables one to distinguish a "value opportunity" from a "value trap". We utilize InView's Financial Strength Model to direct our research efforts toward companies with adequate Financial Strength and secular growth. We seek to partner with a solid management team with proven execution ability and shareholder focus to "unlock" a company's full earnings potential and Value.
  • Strong Outlook
    We seek a company executing a profitable business strategy that enables it to earn  Normalized Earnings Power greater than current reported earnings within a  three-year horizon. Normalized Earnings Power is the true measure of the sustainable operating profit potential of a business model giving effect to successful strategy implementation in a steady-state economy. However, current profits may be dampened by transitory events disguising the true earnings power and economic Value of the business model. We seek a company whose current profit margins are meaningfully below normalized and historic peak levels. We have the potential to earn superior investment returns if a company's profitability mean-reverts; closing this profitability gap, increasing its reported earnings, and accelerating its earnings growth. Meaningful risk reduction is also a valid business strategy as it lowers the company's cost of capital. Even small declines in cost of capital can result in disproportionately positive value creation.


Qualitative Research
We identify companies with Strong Outlooks by researching our prospects, one company at a time. We review each company before deciding which candidates to pursue more diligently.

We seek to validate the Four Elements of Performance, an attractive expected rate of return and business progress in executing its business strategy for value creation.

An important product of our research is the calculation of the Internal Rate of Return (IRR), the expected rate of return on the investment over the next three years. A company with a particularly attractive (high) IRR indicates a price meaningfully below our estimate of Intrinsic Value.

Using a proprietary relational database system we rank-order IRR (from highest to lowest) across our investment candidates. This results in the identification of the most attractive potential investments and directs our ongoing research efforts to these companies. Our time is spent gaining insight with our potentially most rewarding investment candidates.


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