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Investment
Philosophy
Process Buy/Sell Discipline
Investment
Philosophy
Our
investment philosophy is that
active fundamental stock selection can provide outperformance to an
index of
securities over time because business values differ from stock prices
at
various times over the course of a market cycle. The Profit Large Cap
Equity
product is an Active Core Large Capitalization approach to investing
that is valuation-sensitive
growth investing.
The
product utilizes the Profit
Investment Management Style (PIMS) and focuses on companies that have
the
potential to outperform a stock market average from
(1)
Rapid earnings
expansion
(2)
Investor
revaluation of the relationship between a company’s fundamental
valuation and its
current market price
Our
Large Cap Equity Composite
portfolio is a focused, low-turnover portfolio that typically consists
of 37-45
companies. We seek to generate alpha by owning securities that
have been
mis-priced by the market (i.e., trade at a significant discount to
their
intrinsic value as determined by our PIMS). Hence, we are
valuation-sensitive
growth investors.
The Profit Large Cap Equity is designed to perform in all
market
environments over the course of the market cycle. At the core of
our
process is the belief that mis-priced businesses can be found within
the stock
market at any point within the market cycle.
Process
Profit
Investment Management (PIM)
initiates the research process with our in-house proprietary screening
model—PIMS—which is most similar to the GARP investment style. It is a
rigorous
process that blends fundamentals-based quantitative analysis, focused
qualitative reviews, risk-control guidelines and advanced technology to
assess
stocks and build portfolios.
PIMS
capitalizes on the fact that,
after one adjusts for market and industry group influences and
temporary market
effects, successful stocks share common characteristics. We combine
fundamental
market knowledge with technology to identify characteristics driving
equity
returns. This enables the investment team to systematically evaluate
several
thousand stocks with efficiency, objectivity and consistency. Each PIM
portfolio holds large capitalization stocks that have trailing P/Es
lower than
the benchmark, Return On Equity greater than the benchmark, P/E to
Earnings
Growth (PEG) below a specified level, and at least double digit
five-year
projected earnings growth.
PIM
determines the company's
intrinsic value (what a rational buyer would pay for the entire
company)
through discounted cash flows, historical market multiples and
transaction
multiples. The investment team then verifies the strength of the
company's financial statements by reading 10Ks, 10Qs and industry
reports. We read current news to learn why the company's stock is
trading
at a discount to our intrinsic value calculation. This step provides us
an
advantage absent with many firms: avoiding overconfidence. By taking
time to
critically try and prove our investment thesis wrong before entering a
position, we are able to determine if our thesis holds water or if the
market’s
assessment is correct. This is an additional reason our turnover is
lower than
the typical firm’s.
The
portfolio manager verifies
whether the company's competitive advantage is sustainable. For
example, the PM
may ask himself if the company is able to deliver the earnings
projected and if
there is an identifiable catalyst to assist other investors in
recognizing the
stock’s value.
Finally,
those stocks selected are
then purchased and held until our price objective is attained or until
our
investment thesis is proven incorrect. We’re looking to avoid being
overconfident even after entering our position.
Buy/Sell Discipline
PIM
buys a security when 1) the
valuation is low compared to the earnings growth of the stock and 2) a
rationale for the stock market mis-pricing of the security can be
identified
and correctable. The characteristics that we consider attractive for a
stock to
be considered in our portfolio include: 1) a low P/E relative to a
company’s
history and/or its peer group 2) attractive return on equity 3) strong
management team 4) low price to earnings growth ratio 5) consistent
earnings
growth rates and 6) the value of the company should be trading at least
30%
below our calculated intrinsic value.
PIM
sells a
security when (1) it
becomes overvalued relative to its intrinsic value (2) our price
objective is
attained (i.e. market price within 10% of intrinsic value) 3) a
substantial
change in the company’s fundamentals occurs 4) we have a loss of
confidence in
management's execution of business objectives 5) there is a fundamental
change
in competitive landscape 6) the price becomes overvalued relative to
other
investment opportunities 7) there is a material decline from initial
purchase price
or 8) the company suffers from substantial underperformance relative to
its
sector.
Eugene Profit makes all the key
decisions at every stage in developing the portfolio.
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