Small/Mid Cap Value Equity

Security Selection

The objective of the Small/Mid Cap Value Equity strategy is to provide capital appreciation by investing in a diversified portfolio of small to mid capitalization stocks with low price to book, price to sales, price to cash flow and price to free cash flow ratios.

Our disciplined approach includes a continuous, multi-phase portfolio construction process, which begins with the examination of an investable universe of over 11,000 issues. We perform an initial screen for issues with a market capitalization from $250 million to $5 billion. To ensure liquidity, we also screen for issues with an average trading volume of at least $3 million per day. This reduces the universe to approximately 1,700 value stocks. This universe is then cut in half using valuation measures. The resulting universe remains relatively unchanged over time, as it tends to contain small to mid cap companies with solid market niches and strong cash flow, but limited growth potential.

Identifying which are the best companies for investment is where our bottom-up due diligence comes into play. We seek to invest in the right company at the right price at the right time.

Right Company
By narrowing the universe in the manner noted above, our portfolio managers can focus on gaining in-depth knowledge of the companies they cover and understanding a management's philosophy and practices. This helps us to determine the quality of an investment.

We specifically search for companies with profitable reinvestment opportunities and/or willingness to return profits to shareholders.

We also continuously evaluate factors such as the company's economic value added (EVA), capital allocation discipline and the impact of past management decisions. We do this in an effort to identify future opportunities or potential problems that may affect shareholder return potential. Items we examine include:

  • Is the stock under valued relative to future business prospects?
  • What is the future growth rate of the company?
  • Is that growth sustainable?
  • Industry analysis to determine the company's positioning
  • Company product review and competitive analysis
  • Management review to determine if management is making the right decisions for shareholders
  • Analyzing how macroeconomic conditions will affect the company's prospects
  • Accounting review for potential signs of deteriorating business conditions such as increases in days sales outstanding (DSOs) and lower inventory change, deteriorating cash flow relative to net income
  • Insider selling/buying to signal management's confidence in the company


This continuous analysis enables us to shift our focus away from companies with unpredictable prospects or management practices while still monitoring them over time for potential positive changes that might warrant a second look.

Right Price
Our process not only seeks to identify the right companies, but to purchase those companies at the right price. We analyze stocks for two essential elements: statistical cheapness and intrinsic value.

Statistical Cheapness
To determine the company's statistical cheapness, we screen for low price to book, price to sales, price to cash flow and price to free cash flow ratios relative to the universe, the stock's sector and the stock's own history.

Intrinsic Value
Balance sheets and earnings growth are analyzed and dividend discount (DDM) and discounted EVA models are applied and compared to the results of this analysis to determine an intrinsic value score. We concentrate our research on stocks ranking in the cheapest 50th percentile.

Right Time
In addition to determining the right companies at the right prices, we apply continuous and rigorous fundamental analysis and search for a catalyst to indicate improving investor sentiment. Catalysts are typically company, industry or macroeconomic developments such as:

  • Company consistently meets or beats expectations and future forecasts are raised
  • New product cycle
  • Entry into new markets or gains in market share
  • New management that is turning, or has the potential to turn, the company around
  • Acquisitions or divestitures that allow the company to expand or pull back to focus on core competencies
  • Government/regulatory changes which will improve earnings
  • Changes in pricing power as an industry dynamic
  • Macroeconomic developments
  • What negative catalysts could hurt the company's or stock's performance?


The result of our efforts to purchase the right companies for the right price at the right time is a well diversified portfolio of approximately 100 issues.


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