Objectivity, consistency and first-hand research are at the heart of our fundamental investment process. We start with an initial stock universe. In the U.S., for example, this is about 2000 stocks contained in our Smallcap and Microcap universes.
Each quarter new data is gathered for each company in order to calculate an efficient price according to our GRAPES (Growth Rate Arbitrage Price Equilibrium System) valuation model. Companies who pass this initial test are screened further. We are looking for:
- Companies with sound business models with a margin of safety and a history of profitable operations. While we are not focused on growth per se, we do look for improving business trends.
- Companies who have not engaged in actions that have hurt shareholder returns.
- Companies that are relatively neglected by the market. We generally try to steer clear of market darlings which have high volume and analyst attention.
The companies which make it through this secondary screening are now subject to our in-depth analysis. We analyze the company’s financial statements, presentations and press releases. We pay particular attention to items such as poison pills or related party transactions which indicate whether a company is truly run for the benefit of shareholders. If a company passes all of our tests in a satisfactory way, we will purchase shares on behalf of our clients.
Weightings are considered both on a portfolio basis and an individual stock basis. We perform a risk reward analysis for each stock, targeting a 3 to 1 ratio between our projected potential gain and our projected risk.
Once a stock is in the portfolio, we carefully monitor the company’s progress and developments. We will apply our sell discipline in the case of important changes, and also re-weight the portfolio according to our view of the relative opportunities.