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 that 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 along with other metrics and view them relative to a company’s own history as well as relative to its peers. 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 maximize the potential for outperformance. The All-Cap strategy invests in 50-60 holdings, with a targeted 5% maximum individual stock weighting for risk control. The Small-Cap strategy invests in 25-40 holdings with a targeted 7% maximum individual stock weighting limit. While some All-Cap managers invest across the market capitalization spectrum, our clients benefit by having a minimum of 10% and a maximum of 60% in each market capitalization category at all times (small, mid and large).
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.