We look for companies that trade below our estimate of their true worth thus providing a satisfactory potential return. We determine value in the following ways:
Price/ (Potential or Actual) Earnings
We use a company’s current, normalized, or potential earning power to determine if it is trading at a discounted valuation to those earnings.
Free Cash Flow/Enterprise Value
Cash brought into the business can be returned to shareholders in the form of buying back stock, paying down debt, and distributing dividends.
Book value is a guidepost for our valuation process. It offers a measure of downside protection and potential price appreciation provided a company’s assets can be more profitably utilized.
We prefer to buy stocks trading at low multiples of the above ratios. In doing this, downside risk may be minimized and lead to price appreciation as these multiples expand to more normal levels.
In a perfect world, we look for companies with no debt and a net cash position. However, some opportunities may come from securities with debt; each situation is viewed in light of their risk-adjusted return.