Our strategy is to generate attractive long-term returns by investing in a concentrated portfolio of quality growth companies. From a carefully selected Universe of roughly 40 potential investments, our portfolios typically hold shares in 15-20 businesses.
Companies are chosen for the Universe following extensive analysis of their business prospects, industries and management. Specifically, for a company to be chosen, our analysis must support the likelihood of 12-15% average earnings per share growth for the next 5-7 years. Regular dialogue with company management is a prerequisite for inclusion in the Universe.
In our forecast model we derive fair present value at a significant discount from our projected valuation five years out, with the discount rate commensurate with our perception of relative risk. We then weight the portfolio toward those businesses that tend to sell at the greatest discounts to our fair present value appraisal. Generally speaking, shares in 15-20 of the most attractively valued businesses are held in the portfolio. We consistently monitor and reassess each company’s investment thesis, market position, and valuation. Changes in any of those criteria can lead to an increase, decrease or elimination of the position in the portfolio. Importantly, businesses that remain promising, though overvalued relative to others in the Universe, continue to be monitored and appraised. As market prices change over time, the ongoing effort we make to thoroughly understand each business can pay off in future opportunities. We will typically add or delete three to five prospective investments in our Universe each year.
Large well-managed businesses that can grow their earning power by an average of 12-15% each year over a period of 5 years or more should generate very favorable returns for their owners when purchased at a reasonable valuation.
-Bill Stewart, Chairman