A cornerstone of our firm’s investment philosophy is that markets for equity securities of small capitalization companies are inherently inefficient and that an exhaustive, disciplined, fundamental bottom-up research effort that follows our well-defined investment process will lead to the discovery of attractive investment candidates. We seek to capitalize on our extensive small cap value investment experience (27 years on average), in-depth knowledge of business models, proficiency in research analysis and extensive valuation expertise.
private market value
Our distinctive investment philosophy employs a “private market value” approach to small cap public equities utilizing an owner-like mentality. We value operating businesses as a private buyer would. Our investment focus is on long-term fundamentals and value creation, while deploying rigorous, bottom-up fundamental research and relying on absolute, not relative, valuations. As value investors, we aim to invest only in companies that trade well below our assessment of their private market value. However, we do not consider value and growth as mutually exclusive. We deem growth to be another characteristic of a business while value is the result of interactions among buyers and sellers of securities. As long-term owners, we strive to own companies whose private market values are growing.
Margin of safety
While applying a margin of safety, the assessment of risk (or “downside protection”) is first and foremost in our investment approach. We define risk as the potential for a permanent loss of capital while regarding price volatility as an opportunity to enter or exit positions advantageously. One of our main objectives is to provide superior principal protection in down markets and to competitively participate in up markets (i.e., favorable “upside-downside capture”). This focus on downside protection is singularly applied during the research of each investment opportunity.
We seek to invest in high-quality companies with superior business models, distinct sustainable competitive advantages and underleveraged balance sheets that are operated by first-class managers who act as stewards of shareholders’ capital. We have no interest in companies with inferior economics or levered balance sheets, even if they are statistically cheap. When researching companies, we remain within our circle of competence while strictly adhering to fundamental analysis and taking advantage of behavioral biases in the market. Our investment horizon for any individual holding is typically two-to-five years.
free cash flow
Free cash flow analysis is one of the foundations of our investment philosophy and valuation assessment. We believe that high-quality companies generate ample free cash flow, not just net income as determined under U.S. GAAP. Successful business managers can redeploy this free cash flow at attractive returns and compound the company’s value over extended periods. In our assessment of value, the measure of a company’s free cash flow generation profile is supplemented by other private market valuation metrics.
As a notable positive by-product, our investment philosophy has historically resulted in a high number of buyouts among the companies in which we invested. If the public equity markets do not recognize the value of a company, financial or strategic buyers often will, which can be beneficial to our clients.