Fundamental Research

Identify Sustainable, Competitive Protections

The goal of the research process is to identify companies with business models that possess enduring competitive protections and control over their markets. The process is designed to develop a deep understanding of the sources of these competitive protections and control. Further, this analysis must lead to a high level of conviction that these protections can be sustained going forward for a security to be considered for investment.

Take a Business Analyst Approach

We employ thorough research in an attempt to understand the advantages and vulnerabilities of a business so that we can accurately assess its value. Our research process begins with an analysis of the company’s financial statements. In terms of the balance sheet, we look for companies with high intellectual capital and low physical capital. This typically results in low debt and high free cash flow. In terms of the income statement, we look for companies with lower overall fixed costs as this leads to earnings that are more durable and stable. In terms of the cash flow statement, we look for companies with abundant cash generation so significant capital investment is not required to fund operations and growth which increases management’s ability to focus on shareholders.

We also thoroughly and consistently review regulatory filings, press releases, and industry data. We speak with competitors and customers. We conduct comprehensive interviews with management and evaluate their long-term strategic decision-making rather than short-term quarterly earnings. We assess their ability to effectively manage and allocate the business’ capital.

Pay the Right Price

The firm’s valuation analysis determines a price range relative to the long-run economic earning power of a business that would enable an investor to achieve an acceptable expected total return over a multi-year period. Valuation is determined on an absolute basis as well as relative to other available opportunities.