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September 22, 2006
Strategy for ESVF
My investment strategy is to spend time to understand each company and its industry. This involves a significant amount of analysis of a company’s financial operations and their products and markets. I like to concentrate on companies and industries that have certain attractive characteristics – pricing power, minimal capital investment needs, large profit margins, and sales growth. These types of companies can generate substantial free cash flow which allows them tremendous opportunities to expand their own operations, acquire other companies, payoff debt, or repurchase shares.
Essentially, I am a “bottom-up” fundamental value investor. I seek to purchase shares that are trading at a discount to my estimate of their intrinsic value. Ideally, I want to find a company that is likely to grow its intrinsic value in the future. This creates the potential for superior returns – the growth in per share intrinsic value and the narrowing, or closure, of the gap between my purchase price and intrinsic value.
But unlike many value investors, I am not only looking for companies that are trading at the widest discounts to intrinsic value. What I look for is undervalued companies that have a potential near-term catalyst that will hopefully result in the elimination of that discount. I don’t want to buy a dollar for fifty cents and have to wait a number of years for the stock to reach its one dollar value. Over that timeframe I would rather own a series of stocks that were selling at smaller discounts, of say 20-25% that narrowed. It is essentially like retailing. I would rather turnover my investment funds more times with modest returns than fewer times with a large return.
Over time I have developed a blend of owning core stocks that are being held for long term gains, while also owning stocks that I expect to have near term catalysts that will result in short-term gains. When situations arise where a stock I like long-term is likely to suffer a temporary hit, I will take short-term profits on some or all of my holdings with the goal of repurchasing shares cheaper at a later date.
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