This strategy screens for large capitalization equity securities of strong businesses selling below their long-term intrinsic value as measured by our investment professionals. This yields a downside margin of safety through rigorous fundamental analysis of the balance sheet and operating metrics, while identifying potential upside catalysts through management interviews, company visits, and industry conferences.
Our team identifies companies with greater than a $5 billion market capitalization. The analyst reviews quantitative measures including price-to-earnings ratio, balance sheet strength, cash flow, earnings, and dividend growth potential. As well as, qualitative measures including efficient use of capital, management style and adaptability, market share, product lines and pricing flexibility, distribution systems, and use of technology to improve productivity.
We are bottom-up managers, making decisions one stock at a time. This strategy typically diversifies across major economic sectors, holding 50-60 companies at one time. Annual turnover is expected to be low at around 25-30% annually; however, discretion on purchases and sales is left to the portfolio managers.
Securities that meet our quality/valuation criteria are bought based on relative expected risk-adjusted returns. Once we have identified a security meeting our purchase criteria, we evaluate the security in the context of our market and sector outlook and position it appropriately in the portfolio.
A security is sold when:
- The stock price exceeds its intrinsic value amid no improvement in business fundamentals
- When deterioration in fundamentals invalidates our investment thesis for the security
- Appreciation potential becomes too low compared with perceived risk
- When a superior investment alternative is uncovered (competitive force-out)
In addition, securities are candidates for position reduction or sale if total holdings exceed 5% of the portfolio.
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