|1.||Quality – measured by reference to a company's past and projected returns on investment (ROI). The higher the average ROI, the better the company.|
|2.||Value – measured by comparing the current market valuation with a valuation derived from a discounted cash flow** from existing and future investments.|
|3.||Earnings trends – analyzed over the short term to gauge changes in market attitude about a given company's prospects.|
|4.||Price momentum – measures relative market performance over 3, 6 and 12 months. Different from strict technical analysis, price momentum can indicate market sentiment and helps time purchases and sales.|
By ranking companies using these 4 criteria, we can sift through the data to prioritize candidates for extended due diligence, testing and research. The process is unbiased, repeatable and scalable; and by narrowing and defining the list of candidates for potential purchase or sale, we can focus our detailed stock research efforts where it is most warranted.
Having efficiently identified potential candidates for purchase or sale the detailed analysis begins. We subject the output of the screening process to a sense check which ensures that the raw output represents a true and fair view of reality. We then build profit and loss models, balance sheets, and cash flow statements for each investment candidate when appropriate. This concentrated process allows for a 'nuts and bolts' analysis of the key financials and highlights where opportunities and risks may lie. We take opportunities to meet with company management whether it is in our office, on a company site visit or at conferences.
We spend significant time considering the macro drivers for each fund. We attend industry and investment conferences throughout the year and make use of broker research for macro data and information that we use to form our sector outlook.
Based on what we learn firsthand, we generate buy and sell ideas internally.
*Return on Investment is a measure of profitability; net profits divided by net worth or total equity.
**Cash Flow is a measure of a company's financial health; cash receipts minus cash payments over a given period of time.