Investment Process

Step 1: Screening

We begin by charting Enterprise Value / Invested Capital vs. Return on Invested Capital for the entire universe:

  • Stocks residing below the regression line are candidates for further evaluation
  • Stocks above the line are considered overvalued

Step 2: Quantitative Analysis

We rate the stocks in our universe according to our proprietary quality rankings model using the following factors:

Step 3: Qualitative Review

We believe quality companies defend and maintain high returns on capital through proven/durable competitive advantages, such as:

Step 4: Valuation Test

We understand that a company’s market value is comprised of its invested capital and discounted future economic profits:

  • Therefore, a company only creates value if its return on invested capital (ROIC) is greater than its cost of capital (COC)
  • And, if the ROIC is less than its COC the company destroys capital and market value should be less than invested capital (these are stocks we look to avoid)