Investment Screening
One of the first steps is to screen the market for financial metrics for relevant securities within the Russell 1000, Russell 2000 indices or various international indices. Those quantitative results are used to help qualitatively rank securities. Securities are assigned to categories that dictate whether securities are researched further or added to various watch lists. For select securities that screen well, SEC filings, industry reports, company presentations, earnings call transcripts are all researched to determine securities to be purchased and in what quantity. Several watch lists are kept.
Investment Criteria
Discounted Cash Flow Analysis
All securities need to be able to pass a discounted cash flow analysis. Relative value metrics are important but discounted cash flow analysis is the most important valuation technique used.
Although circumstances change and the results may prove inaccurate, this analysis is an important exercise to do for every security that is to be added to the portfolio. The objective is to identify securities that still have an undervalued market cap with a 15% discount rate. 15% compounded for 5 years doubles an investor’s money.
Balance Sheet Analysis
Strong balance sheets are preferred but the strategy will invest in companies with exceptional characteristics that possess a weak balance sheet. The bar is set high for companies with weak balance sheets. Adjustments are made in DCF models for companies that have good or bad balance sheets because balance sheets can hinder or create flexibility to grow earnings.
Catalyst on the Horizon
A catalyst could be a changing business condition or it could be a capital structure decision. The strategy invests in turnaround (turnaround being stocks that are expected to have a big positive shift in financial performance in the near future) stocks but the visibility to that turnaround needs to be apparent.
Management Credibility
Shareholders are the owners of companies and should be treated with respect. Companies whose management appears to have the interests of shareholders as a secondary consideration can often times have depressed stock valuations that persist for a long time. One of the best forms of shareholder friendly activity is a dividend and companies that pay dividends, even if it is a modest one, are viewed favorably.
Mispriced Embedded Options
Sometimes change within an underperforming business unit or an external event can change the valuation of a company significantly but the market appears to be ascribing little chance to those events occurring. The strategy attempts to identify those types of options embedded in the valuation of a company.
External Market Option Pricing
Option pricing is analyzed for securities held in the strategy and those under consideration. Covered call writing will be used to generate additional income for the strategy at opportunistic times. In addition, long calls or puts may be purchased if the right conditions evolve.
All securities need to be able to pass a discounted cash flow analysis. Relative value metrics are important but discounted cash flow analysis is the most important valuation technique used.
Although circumstances change and the results may prove inaccurate, this analysis is an important exercise to do for every security that is to be added to the portfolio. The objective is to identify securities that still have an undervalued market cap with a 15% discount rate. 15% compounded for 5 years doubles an investor’s money.
Balance Sheet Analysis
Strong balance sheets are preferred but the strategy will invest in companies with exceptional characteristics that possess a weak balance sheet. The bar is set high for companies with weak balance sheets. Adjustments are made in DCF models for companies that have good or bad balance sheets because balance sheets can hinder or create flexibility to grow earnings.
Catalyst on the Horizon
A catalyst could be a changing business condition or it could be a capital structure decision. The strategy invests in turnaround (turnaround being stocks that are expected to have a big positive shift in financial performance in the near future) stocks but the visibility to that turnaround needs to be apparent.
Management Credibility
Shareholders are the owners of companies and should be treated with respect. Companies whose management appears to have the interests of shareholders as a secondary consideration can often times have depressed stock valuations that persist for a long time. One of the best forms of shareholder friendly activity is a dividend and companies that pay dividends, even if it is a modest one, are viewed favorably.
Mispriced Embedded Options
Sometimes change within an underperforming business unit or an external event can change the valuation of a company significantly but the market appears to be ascribing little chance to those events occurring. The strategy attempts to identify those types of options embedded in the valuation of a company.
External Market Option Pricing
Option pricing is analyzed for securities held in the strategy and those under consideration. Covered call writing will be used to generate additional income for the strategy at opportunistic times. In addition, long calls or puts may be purchased if the right conditions evolve.
*The investment(s) discussed may not be suitable for all investors. Investors should make investment decisions based on their own specific investment objectives and financial circumstances.
**Additional information is available upon request.
***Any investment contains risk, including the risk of total loss, fluctuating prices and uncertain returns.
**Additional information is available upon request.
***Any investment contains risk, including the risk of total loss, fluctuating prices and uncertain returns.
