STRATEGY AND
PROCESS
We seek to build a portfolio whose earnings in aggregate grow 15%* or more per year. That growth rate is about twice the long-term rate of growth of the S&P 500 Index. This emphasis on businesses with persistently high growth in earnings power is crucial to the Stewart strategy.
Earnings growth of 15%* annually means that the earnings of our holdings double every five years. Stewart Asset Management and its predecessor have been able to accomplish this task over the last fifty years.
If our portfolio’s current price-earnings ratio is 20X-28X, then paying a price-earnings ratio of 10X -14X five years from now for a portfolio of exceptional, world-class companies has generally resulted in strong long-term gains for our clients.
Share price advances are rarely steady and uninterrupted. When prices do consolidate the high, persistent growth in earnings power behind the portfolios protects our clients’ capital.
As important is the high-quality of the companies we own. All are self-financing, much of their revenue is recurring and, while they almost always have a high re-investment rate, they also generate free cash.
Our investment process consists of three main parts:
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Creating Our Universe
- A leading company in its industry, usually number one or two
- One of the forty or so best businesses to own for the next decade
- Superior double-digit earnings growth over the long-term
- Large, growing addressable end markets both domestically and internationally
- Significant recurring revenue
- Proven management in depth that has weathered many storms
- A high re-investment rate: appealing incremental unit economics
- A very sound balance sheet
- Minimal cyclicality
- Significant size – several billion dollars in revenue
Based on our modeling, we determine a 5 year forward estimated stock price, which is then discounted back to the present using a discount rate that creates margin of safety.
We are then able to assign a “fair present value” or “central value” to a universe company. We then compare the current price to the “fair present value” to determine a prospective holdings “appreciation potential.” We determine a value by using the time-tested valuation methodologies and databases we have developed over many investment cycles. This attention to valuation creates a “margin of safety” in our investments.
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Constructing the Portfolio
Based on our financial analysis, qualitative assessments and management meetings, we build a detailed financial model that projects each company’s financials over the coming five years. Based on our projections, we come up with a 5 year forward estimated stock price, which is then discounted back to the present at a rate that varies depending on the perceived challenges in that company’s business model and a healthy risk premium. Our appraisal of fair present value is compared to the current stock price, and the difference is the appreciation potential.
Typically, shares in the 15-20 businesses with the greatest appreciation potential are included in the portfolio at any given time, with their weight influenced by appreciation potential, industry concentration, and relative volatility.
We make changes to the portfolio to maintain its long-term growth in earnings power at 15% and invest in companies that have significant “appreciation potential.”
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Monitoring Our Holdings
All of the companies we follow, whether in the portfolio or in the Universe, are continuously monitored. We try to meet with the companies, their customers and their competitors on an ongoing basis, and attend industry events to stay current.
While we aim for relatively low turnover, we recalibrate our models and adjust positions when appropriate, rotating out of overvalued shares into those with greater appreciation potential. Businesses that remain solid, well-run companies with strong growth prospects remain in the Universe even after being removed from the portfolio. These businesses will often, at some point, become attractive again from a valuation perspective, and re-enter the portfolio.
Our continuing involvement and ongoing appraisal of these companies and their managements permits us to be prepared to move adroitly when opportunities present themselves. Only when there is a negative change in a company’s fundamentals such as management, competitive environment, growth prospects, etc. would that business be removed from the Universe.
We are continuously looking for new potential candidates for the Universe.
Between monitoring those already in the Universe, and constantly evaluating new candidates, ours is a research-intensive process. It is the depth and intensity of that research that helps us build great conviction in the businesses we invest in and, historically, conviction leads performance.
* Performance Disclosures The return provided is the performance of an account (“Flagship Portfolio”) that the Firm believes fairly represents the performance of the Stewart Asset Management Team’s (“SAM”) strategy (“Strategy”). The “net” returns presented are after the deduction of management fees as well as other expenses, including costs associated with brokerage. The “gross” annualized returns without the deduction of management fees and any other expenses, including trading costs are 16.98%, and are provided as supplemental information to net returns. Annualized returns are based on performance of the Flagship Portfolio starting from October 13, 2014 (“Inception Date”) to October 31, 2024. Performance returns reflect the average annual rates of return. Performance from Inception Date to March 14, 2024, reflects SAM’s investment performance as a team at Stewart Asset Management, LLC, which was a period prior to SAM’s move to and continued management of the Strategy at Ingalls & Snyder, LLC (“Ingalls”). Generally, the Strategy maintains an allocation ranging from 1% to 4% in cash.
In addition to the annualized returns provided for a 10-year period, the Flagship Portfolio’s performance for a 1-year period from November 1, 2023 to October 31, 2024 is 44.47% , net of fees, and the performance for a 5-year period from November 1, 2019 to October 31, 2024 is 16.83%, net of fees.
Ingalls believes that the stated performance is an accurate representation of SAM's prior performance. The Flagship Portfolio represents how SAM generally implements its investment process under normal market conditions. Past performance is not an indication of future results. The performance of each client’s managed account may differ due to specific investment guidelines, restrictions and time period which the account has been open and under the management of SAM. Accordingly, individual results will vary.
Additional DisclosuresThis Strategy are subject to market risk, which is the possibility that the market values of securities owned in an account will decline. Accordingly, you can lose money investing in this Strategy. Please be aware that this Strategy may be subject to certain additional risks. In general, equity securities' values also fluctuate in response to activities specific to a company. Investments in foreign markets entail special risks such as currency, political, economic, and market risks. American Depositary Receipts (ADRs) represent an ownership interest in securities of foreign companies and involve many of the same risks as those associated with direct investment in foreign securities, including currency, political, economic and market risks. The Strategy may, from time to time, invest in stocks of small- and medium-capitalization companies which entail special risks, such as limited product lines, markets and financial resources, and greater market volatility than securities of larger, more established companies.
The Flagship Portfolio has employed the investment strategy in a similar manner to that employed in the SAM’s separately managed accounts (“SMAs”). However, portfolio management decisions made for the Flagship Portfolio may differ. The holdings and portfolio activity in the Flagship Portfolio may not be representative of some SMAs managed under this Strategy due to differing investment guidelines, client restrictions, and the time period the account was opened and managed by SAM.
There is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. Please consider the investment objectives, risks and fees of the Strategy carefully before investing.
Any third-party data has been obtained from sources that we believe to be reliable, but we do not guarantee its accuracy, completeness or timeliness. Third party data providers make no warranties or representations relating to the accuracy, completeness or timeliness of the data they provide and are not liable for any damages relating to this data.
Ingalls & Snyder, LLC is a SEC registered investment adviser and FINRA member broker dealer. For important information about the investment manager, please refer to Form ADV Part 2 and Form CRS which are located here.
New York, NY 10020-2003
(212) 269-7801
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