Investment Criteria

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What We Overweight

  • Credit risk; unlike interest rate or option risk, it is not an efficient, zero sum game
  • Small to mid-cap companies and one-off industries, poorly followed and therefore inefficiently priced
  • Companies where our work can give us a proprietary information advantage
  • Companies with true free cash flow today, not tomorrow
  • Simple capital structures
  • Industries driven by:
    • Favorable demographics
    • Volumes or activity levels, not by output prices
    • Recession resistant cash flows
    • Intelligent outsourcing, especially away from high cost labor

What We Underweight

  • Emerging markets — a different skill set
  • Large cap, intensively followed companies
  • Complex capital structures
  • Companies with bad compensation plans
  • Turnaround stories requiring management execution
  • Roll-ups (where no clear economic advantages are evident)
  • Industries with the following criteria:
    • Undergoing adverse fundamental changes
    • Have historically over-invested in capacity and earned less than cost of capital
    • Short product cycles
    • High economic exposure to exchange rates
    • High operating leverage
    • With highly cyclical cash flows
    • With high maintenance CAPEX
    • With hidden leverage
    • With rapidly changing risk