New Idea Generation: Identify low expectation stocks
We utilize multiple resources to generate new ideas for our portfolios. Many of our new ideas fall into the categories of: special situations, asset plays, busted IPO’s, spin-offs, out of favor stocks and under-appreciated stocks with limited Wall Street coverage. With annual turnover of approximately 20%, our goal is to find up to ten exceptional new investment ideas per year.
Comprehensive Analysis: A process where art and science converge
Our focus is on:
Understanding a business is not as simple as “what does this company do?”, or as detailed as “how many units will this company sell to the rural markets in western Brazil this quarter?” In the global economy there are many complex forces that determine the success of a business and we seek to truly understand the ones that matter for the long-term. What gives the company competitive advantages over its competition? Why are these advantages sustainable? We use a combination of research and intuition as the foundation of our investment process.
Before investing in a company, we conduct our version of “detective work” focused on management’s credibility and ability to execute. We use historical, archived conference calls to gain a perspective rather than only getting the current “story” from the Investor Relations Department or meeting management for the first time. Management execution is especially important in small-cap stocks in our opinion, accounting for up to 80% of their success.
We look to uncover assets trading below our perception of their intrinsic value, based on potential catalysts we expect to develop. Balance sheet strength, cash flow and sustainable revenue growth are also key ingredients to identifying a Winslow stock.
By eliminating the potential manipulation of earnings, the Price to Sales metric has been a very successful tool for assessing a company’s valuation. We review Price to Sales as well as other typical metrics and view them relative to a company’s history and the specific sector or industry. Through our valuation work, we are able to purchase companies at prices with an imbedded margin of safety.
Portfolio Construction & Risk Controls: Build a diversified portfolio using an incremental approach
Both equity strategies are diversified by sector exposure, yet remain concentrated enough to provide the best chance for outperformance. The All-Cap strategy invests in 50-60 holdings, with a 5% maximum individual stock weighting risk control, while the Small-Cap strategy invests in 30-40 holdings with a 7% maximum individual stock weighting limit. While some All-Cap managers merely have the ability to invest across the market capitalization spectrum, our clients benefit by having a minimum of 20% and a maximum of 60% in each market capitalization category at all times.
Sell Discipline: Sell when expectations are high or investment story has changed
Companies are sold when the position size becomes too large, financial metrics are no longer attractive, price targets have been met, business fundamentals have changed or a better investment idea is identified. In addition, our stocks have been taken over by larger companies or Private Equity firms.