Idea Generation (Is it out of favour?)

Our search for new investment ideas focuses upon identifying those companies that are currently out-of-favour, unloved or simply being unfairly ignored by investors. We identify many of these with simple screening tools that highlight stocks that have significantly underperformed versus the wider equity market and/or seen their valuation multiples substantially de-rated. However, we are very open-minded about where new ideas come from and we draw inspiration from multiple sources. What we are trying to find is stocks where the consensus is excessively and irrationally negative, meaning that they have been sold down to unduly low levels. For a stock to interest us, we need to first understand what the consensual, negative view on that stock is, and then be able to build a robust contrary case in opposition to this gloomy received wisdom. The consensus is by no means always wrong, but we believe that the contrarian mindset is the right one for an investor looking to outperform the market.

Fundamental Research (Is it cheap?)

Having identified a potentially interesting investment, the next crucial stage in the process is to determine whether the security is attractively valued and offers significant upside to a conservatively-struck appraisal of its intrinsic value. We conduct rigorous and wide-ranging fundamental research to understand the economics of any potential investment and the industry in which it operates. We need to understand a company’s position in the value chain – how and why it makes money for shareholders –  and to be comfortable that it has an appropriate capital structure. When we are satisfied that we have a sufficient understanding of the business, which will not always be possible, we will then derive an estimate of its intrinsic value and, if there’s enough risk-adjusted upside to our estimate, the stock is likely to be bought.

Portfolio Management (Should it be in the portfolio?) 

We are long-term investors looking to profit from recovery in our portfolio companies, which can unfold over many years. Holdings periods will typically be long and portfolio turnover low. The portfolio will typically bear little resemblance to the wider stock market indices and may at times be heavily focused on a relatively small number of areas, as we will only buy those stocks that are both out of favour and attractively valued.

Competitive Advantage (Do we have one?)

In a world of data ubiquity and almost unlimited computing power it is exceedingly hard to gain a competitive ‘edge’ based upon the possession of superior information. And insider trading laws also have something to say here. We therefore make no claims to having more or better information than other market participants and nor are we better at forecasting. Where we think we do have an advantage is in our ability to consistently execute upon our differentiated process. Buying unpopular, lowly valued stocks and patiently holding them through their recovery is conceptually simple, but behaviourally it is not easy.