Investment Selection Criteria

Placement on the Monitoring List

The firms that we discover during the research process are characterized by having either strong shareholder friendly management teams or strong brand name recognition within their industry, thus allowing them to minimize their risk exposure to price competition. Companies of this sort typically have rising earnings and cash flow streams year over year, a manageable level of debt, and above-average returns on equity and capital. The achievement of consistent, above-average returns on equity and capital points at both the health of the franchise and the strength of the company’s management team in performing their capital allocation function. Once a company is deemed by us to have all of the above attributes, it gets placed on our firm's monitoring list.

Placement on the Prospective Buy List

At this juncture, we've simply identified companies that we would consider purchasing. The purchase decision ultimately rests upon whether this strong franchise can be acquired at the "right price". As a means of determining the price where we would become a buyer of a company's stock, we rely on the following valuation metrics:

Price/Earnings (P/E)
Price/Sales (P/S)
Price/Book Value (P/BV)
Price/Free Cash Flow (P/FCF)

Ordinarily, we like to have at least ten years of historical data on a company to determine the average low valuations of the above metrics at which a company's stock has traded. The use of a ten-year time period helps to provide us more meaningful numbers as the data can be measured over different market cycles. Once we calculate a company's current stock price to be at an appreciable discount to the average low valuations of a number of the above valuation metrics, we add the company to our prospective buy list.

Comparison to Other Attractive Buys

We then proceed to the last stage of our investment selection process. This step involves comparing the prospective company's degree of undervaluation to the other companies under consideration for purchase, as well as the companies we already own. Our investment comparisons will result not only in the decision to invest in a company, but the degree to which we will invest.