The process begins with a series of quantitative screens to identify the most undervalued stocks within the universe. The primary selection universe is companies with market capitalizations below $2.5 billion, with particular emphasis on those companies between $80 million and $1.5 billion. We use six primary screens: EPS revision trends, cash-flow/price ratio, book/price ratio, trailing earnings/price ratio, dividend yield, and a net-net (working capital)/price ratio. In an effort to avoid value traps, we focus on consistency of earnings and relative price strength as additional criteria. Only the most undervalued 10-15% of all stocks screened are considered for additional work.
Those companies surviving both the quantitative and relative strength screens are subjected to more intense traditional research analysis, with particular attention paid to their balance sheets. We focus on companies with conservative, easily understood financial structures and a large cushion of tangible assets relative to their stock price. After identifying enterprises that are undervalued and financially sound, we then look intently for catalysts which may cause stock prices to move quickly toward intrinsic value.
The portfolio typically contains between 45 and 75 stocks. Holdings are well diversified by sectors and industries. Particularly attractive industries may comprise up to 15% of the portfolio and the maximum sector weighting is 40%. Securities are roughly equal-weighted at time of purchase ranging from 1-2%. Maximum position size is 7%.