Process

SCP utilizes a weekly report appraising various quantitative factors, providing a ranked list of companies within each sector. Portfolio Managers use the ranking system to narrow the field of candidates without excluding any companies from consideration. The ranking system provides a consistent set of metrics to analyze how the companies may rank over time.

Factors used to calculate ranking include, but are not limited to:

Valuation

  • Price to Free Cash Flow
  • Price to Earnings
  • Price to Book
  • Price to Sales
  • Enterprise Value to EBITDA
  • Dividend Yield

Quality

  • Return Metrics
  • Margins
  • Analysis of Accruals
  • Capital Structure
  • Capital Allocation
  • CAPEX to Depreciation
  • Net Income to CFFO
  • Risk Indicators

Market Reaction

  • Stock Price Trend
  • Consensus Estimates
  • Estimate Revisions
  • Liquidity

Our investment team conducts comprehensive fundamental analysis to evaluate each company’s core competencies,  financial strength, competitive advantages, and management behaviors.

Stable and understandable business model

  • Understandable business
  • Predictable and favorable long-term prospects
  • Low technology/fashion obsolescence

Strength of balance sheet and free cash flow generation

  • Superior long-term profitability
  • High returns
  • Balance sheet strength
  • Debt coverage

Solid management behaviors and culture

  • Accretive share repurchases
  • Stable accounting practices
  • Consistent communication
  • Reinvestment trends
  • Dividend history
  • M&A

Company has “edge” on competitors

  • Distinguishable product or service
  • Durable advantage over the long-term
  • If no competitive advantage; company must be a low-cost operator

Establishing Probability-Weighted Price Targets

  • Guides entry and exit positions
  • Review investment thesis and probability-weighted price targets at minimum on a quarterly basis

Sell Discipline

  • Deterioration in company fundamentals that change investment thesis or risk profile
  • A more attractive investment opportunity exists in another company
  • Exceeding estimated fair value
  • Misjudgment

General Guidelines for Portfolio Construction

  • Build concentrated positions in companies, industries, and sectors that are fundamentally and quantitatively attractive
  • Investment with at least 2-3 year time frame
  • We do not constrain the portfolio to any systematic risk factors
  • Be fully invested