Market Philosophy

Market Price Does Not Equal Intrinsic Value…

The market price of a security and its intrinsic value are not the same, and occasionally large differences can and do develop. Stock prices often change more significantly than intrinsic value. The symmetry between capital investment, rate of return, and growth necessary to justify the market price of a stock may not reflect the economic reality of the business. This may present opportunities to purchase quality companies at prices at or below conservative estimates of intrinsic value.

…Intrinsic Value is a Superior Decision Making Standard.

Pricing metrics (multiples, ratios, etc.) are subject to near term economic conditions and market sentiment. They often provide little information on the long-term prospects of company performance. Multiples are an output of the valuation process not an input.

Intrinsic value, based on the symmetry of capital investment, rate of return, and growth provides an objective measure of value independent of market conditions.

Read Our Thoughts on Intrinsic Value.

“Intrinsic value is based on the symmetry between capital investment, rate of return, and growth. These inputs produce objective values that can be compared to market prices. Intrinsic value is not driven by market prices.”

Quality Criteria

One of the most efficient ways to evaluate companies is to first identify what we want to avoid.

If an opportunity violates our quality criteria, we move on to the next. By quickly eliminating undesirable investments, we maximize the value of our research time. What is left is a group of companies with qualities that we believe provide the foundation for a successful long-term investment. From there, we proceed through our due diligence and valuation process.

  • Low Leverage

    We avoid companies with significant debt. Companies should produce attractive capital returns without needing leverage.

  • Consistent Cash Flow

    We avoid companies that do not consistently produce free cash flow.

  • Conservative Combinations

    We avoid companies that are prone to frequent, unsuccessful acquisitions. It is unlikely that frequent acquisitions can be made at attractive prices. These companies often use dilutive new shares or excessive leverage to complete acquisitions.

  • De Minimis Dilution

    We avoid companies that dilute minority shareholders typically through excessive share-based compensation. Profitable companies should see their share counts flat or falling through repurchases.

  • Invariable Industry

    We avoid companies in obvious secular decline. While many of these companies produce significant cash flow, it is difficult to project how rapid their decline or obsolescence may become.