Montgomery Capital believes that discipline plays an integral role in the investment decision-making process. We work with each client to identify reasonable financial objectives that are within the individual's risk tolerance. Next, we develop an investment strategy, based on the client's long-term goals. Asset Allocation is a key factor in investing client assets. Cash equivalents play a small role, and bonds somewhat larger, with equities being the cornerstone of all our portfolios.
Montgomery Capital is primarily interested in the long-term investment outlook. We examine demographic, political, social and economic trends in order to develop investment strategies for our clients. Our experience indicates that the financial markets do a better job of forecasting the economy, than vise versa. Montgomery Capital employs research to develop our investment strategies within the prevailing secular and cyclical economic framework.
Montgomery Capital uses both a top-down and bottom-up approach to equity selection. The top down part of our effort involves identifying the sectors and industries of the economy that appear best situated from a long-term investment perspective. Our "bottom-up" selection process identifies companies that exhibit above average revenues and earnings. We then invest in the most reasonably valued companies operating in the sectors of the economy that we believe show the best opportunity for growth. Montgomery Capitals' approach to equity ownership is to buy stocks when their shares are reasonably valued, regardless of capitalization. We do believe, however, that small and midsized companies can often grow their earnings at a faster pace, albeit with potentially higher risk than large cap companies. We look for:
- Companies that have had long-term earnings growth which has been and is expected to be superior to that of the S&P 500 and/or the industry in which the company operates.
- Companies that consistently operate at high levels of profitability and achieve above average returns on equity while maintaining conservative financial structures.
- Companies whose management is focused on increasing shareholder value. (This is usually reflected in top management owning significant amounts of their company's shares.)
- Companies with a recognizable catalyst for growth, such as a new product or service or higher guidance for earnings expectations.
- Companies that are industry leaders with superior products, services or other competitive advantages; or companies that operate in defendable niches.
- Companies whose shares are reasonably priced compared to forecasted earnings growth rates and/or to their historic valuation relative to peer industry competitors or to the S&P 500.
When making a decision to purchase a stock there are two basic issues to determine:
- What is the margin of safety? In other words, how much downside risk does there appear to be. We believe that risk comes from how much you pay for a stock.
- What is the company’s intrinsic value? The best way to determine intrinsic value is to discount a company’s future cash flow. Cash flow is a better barometer than earnings. Earnings can be maneuvered more, and include factors such as expensing stock options.
Accordingly we weigh the downside risk potential to the future upside potential, and determine the candidate that demonstrates the best risk vs. reward profile.
When each stock is purchased we have determined an upside potential price and the downside risk, and purchased those companies demonstrating the greatest price potential with the least risk.
We believe in managing concentrated portfolios with usually no more than 40 securities per portfolio, with the holdings broadly diversified across various sectors of the economy. We allow for over-weighting in more attractive sectors, while under-weighting the less attractive. Montgomery Capitals' intent is to own these companies for the long term.
Sell disciplines are equally important.
- Once a stock reaches our price target, we reevaluate to determine its future potential.
- If a stock disappoints, we will also reassess
Usually Montgomery Capital sells stocks when:
- A company no longer meets our selection criteria either from a fundamental change in the company's outlook or due to excessive valuation; or
- Better investment opportunities are available
Montgomery Capital is risk averse in its fixed-income philosophy, and invests primarily in short to intermediate-term investment quality bonds for our clients.
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