Classic Large Cap Value
At a Glance
- Primary Benchmark: Russell 1000® Value Index
- Universe: Companies with market capitalization in excess of $1 billion that we believe are substantially undervalued on a price-to-earnings (P/E), price-to-book (P/B), price-to-cashflow (P/CF), or other valuation basis. Dividend paying companies receive greater emphasis
- Portfolio: Our portfolios are designed to be well-diversified and carefully structured with regard to economic sensitivity. Greater than 50% of companies will have a market capitalization in excess of $5 billion
- We focus on industry leaders
We seek to outperform the investment benchmark over a 3-5 year period, produce a yield greater than the benchmark, and maintain a portfolio with consistent large cap value characteristics.
Investment Process Summary
We build a portfolio of stocks based on quantitative screens and internal research ideas: a majority of our stocks have a market capitalization greater than $5 billion and are cheap on a price-to-earnings, price-to-book value, price-to-cash flow, or other current valuation basis relative to peers, their own history, and the market. Additionally, we look for above-average yields within industries and generally exclude companies that do not pay dividends at the time of purchase. For the companies in our research universe, we undertake rigorous fundamental analysis.
Through fundamental analysis, we seek to understand the reasons a stock is cheap or out-of-favor and to identify those companies that are truly undervalued and most likely to return to normal valuation levels and profitability. Within the universe of undervalued securities, we seek to identify the best combination of valuation characteristics, earnings growth, and quality. Conclusions are based on a company's financial condition, competitive position in its industry, and quality of management. We pay close attention to the cash flow statement in order to evaluate the strength and security of the dividend. In addition, we focus on long-term macroeconomic conditions and industry trends in order to identify and measure the risks associated with a company's business. These factors lead us to identify those companies that have the best potential and necessary catalysts for a return to normal levels of profitability and valuation.
Catalyst recognition can be a key differentiating aspect of our approach. Securities may have multiple catalysts and catalysts may be triggered by micro or macro events. While we emphasize catalysts for recovery, the fundamentals must warrant purchase. Stocks may be added to the portfolio for their valuation characteristics, their yield characteristics, or a combination of both factors.
Although our primary focus is on bottom-up stock picking, top-down considerations are a key part of our process. Macro-economic factors affect a company's outlook and thus are an important factor in determining what might drive a company's stock to the substantial outperformance we seek. Also, these factors may influence our decision regarding our weighting in an industry or sector, absolute and relative to an index. Wall Street often emphasizes thematic trends: if we identify a theme that is consistent with our primary value focus, we will attempt to capture the opportunity/trend in our portfolios.
We follow a disciplined approach to sell decisions, with securities typically sold for three main reasons — valuation, fundamental deterioration, including a decline in the security of the dividend, and stock-against-stock competition. A stock is typically reviewed for sale as it approaches our estimate of its normalized valuation and no longer offers compelling upside potential. Valuation, both on an absolute and relative basis and in light of the potential for continued earnings growth and operating improvements, is the primary factor in sell decisions. Another situation that would lead us to sell is when the fundamentals have deteriorated to the point that we believe the prospect for re-valuation is impaired or the anticipated catalysts, which resulted in the initial purchase, fail to materialize within a reasonable timeframe. Furthermore, a stock may be sold when a more compelling opportunity arises leaving a current holding to be sold as a source of funds.