The portfolio pursues high-quality undervalued companies of all sizes, allowing investors to take advantage of opportunities across the market capitalization spectrum. A company is considered “high quality” if it has most of the following characteristics: strong free cash flow; substantial operating margins; high returns on invested capital; modest leverage; growing revenues and earnings; strong market share; and honest and competent management. 

Free cash flow is used to evaluate potential holdings because it is harder for companies to “manufacture” cash flow than earnings. Companies with strong free cash flow are also able to finance operations internally, and are thus not hostage to the vagaries of the capital markets. Because of our focus on free cash flow, core portfolio holdings tend to be mature businesses.  Periodically, we invest in growth businesses, when the valuations are compelling.  Most of our “growth” stories, however, are in fact cyclical businesses that have fallen out of favor during cyclical troughs. 

Often, the companies we invest in have modest revenue growth, but use incremental margin improvements to generate higher earnings and cash flow, which is then reinvested back into the company through either share repurchases or acquisitions.

Portfolio Manager Jonathan Vyorst and a team of analysts screen for companies that meet valuation criteria using price/earnings and price/free cash flow multiples. Once attractive candidates are identified, the team conducts a fundamental bottom-up research process, including “forensic” analysis of financial statements, management interviews; and competitor cross checks. 

The portfolio is designed for long-term capital appreciation; stocks are sold only when “facts on the ground” demonstrate that original research was mistaken or when stock has appreciated well beyond intrinsic value.