Our Stock Selection Process
A RESEARCH-INTENSIVE PROCESS
Drawing on our collective 50 years of markets experience, we implement a time-tested investment process which has been continually honed over the years. We generate our investment ideas from a wide array of sources: stock screens, industry publications, the popular press, SEC filings, and research reports from Wall Street investment banks, as well as our day-to-day experience as consumers in the U.S. economy.
We primarily rely on two factors when selecting our stocks:
Valuation - this is the most important of the two factors and is the primary driver of whether we will purchase a stock. We establish price targets for each of our holdings which we believe are achievable over the course of the next year. We combine this potential price appreciation with the stock's dividend yield to arrive at our expected return for the year ahead. We typically will not invest in companies with less than a 10% return expectation, and most of our purchases have more like 20 or 30% return potential. We believe buying stocks at a discount to what we believe their fair value to be a year from now provides us with a margin of safety should economic conditions change or we are wrong in our underlying assumptions.
Momentum - whereas Valuation tells us whether to buy a stock, we primarily look to Momentum to tell us when to buy (or sell) it. We score each of our holdings from -100 to +100 (based on 20 measures of the stock's recent performance) and generally avoid stocks with poor momentum. We may also continue to hold stocks which have exceeded their target price if Momentum remains strong. We monitor whether Momentum is improving or fading (buying a stock with a momentum score of negative 40 might not be so bad if it is improving). Although utilizing this factor means that we will rarely buy a stock exactly at its bottom, we believe it improves the chances that we don't "catch a falling knife" and invest in a stock just as others are beginning to run for the exits.