Our search begins with the formation of a Research Universe
for our Small Value Portfolio.
then engage in a disciplined and repeatable investment selection
process encompassing Quantitative Selection and Qualitative Research.
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.
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
- 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.
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
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.
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.
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.