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Our investment process begins with “Idea Generation.” We seek to identify quality businesses that generate strong free cash flow, have high barriers to entry and exhibit durable economic advantages. We are most attracted to companies that are led by strong management teams with a proven track record of success, who have a significant personal financial stake in the company. There is no one source for our investment ideas; they can come from our network of professional contacts, industry conferences, SEC filings, quarterly conference calls/transcripts, sell-side research reports, our existing holdings’ customers, competitors or suppliers, and/or a myriad of industry publications.

Critical to our investment discipline is to initiate positions only when we deem a prospective security to be severely undervalued. Naturally, the next step in our process is our proprietary “Fair Value Appraisal.” In order to establish a conservative estimate of fair value, we conduct an analysis of a company’s historical performance, an estimate of discounted cash flow, comparable company trading multiples and comparable company private market transaction multiples. We employ a private equity mentality towards public equity investing and therefore analyze each stock as if we are buying the entire company, focusing on the cash-on-cash return of the investment. We also evaluate sales, EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) and free cash flow production over an extended time frame, avoiding an over-reliance on any one particularly good or bad year. When warranted, we will assess the value of a company’s other assets, such as excess real estate, net operating losses, or liabilities such as an underfunded pension plan.

The next step of the process is “Investment Execution.” We remain patient and disciplined in our initial acquisition of a company’s shares and invest incrementally. Position sizes are determined by estimated total return potential, perceived risk/reward ratio, and liquidity. We typically ease into positions on negative pulses and ease out of positions into strength.

The final and ongoing step of the investment process is “Portfolio Management.” We manage a concentrated portfolio of 10 to 20 positions and continuously re-evaluate our assumptions to maintain what we believe to be appropriate position sizes. We monitor quarterly conference calls and other presentations made by the companies we hold, as well as their competitors. Positions are sold for three primary reasons: if a security approaches or exceeds estimated fair value, if a superior investment opportunity emerges, or if our fundamental investment thesis proves invalid.

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