Value Investing

Value investing has evolved significantly over the years. In the past, hidden assets such as unrecognized real estate appreciation, tax loss carryforwards, cash flows or potential company spinoffs provided excellent value investing opportunities for portfolio outperformance. Today, while hidden assets are still value drivers, the “new economy” of flourishing e-commerce growth, the increasing healthcare demands of aging baby boomers and expanding technology advances have added a whole new growth dimension to traditional value investing.

While we still abide by our fundamental value disciplines, securities investing more than ever before, now involves additional considerations. For instance, 24-7 market vigilance, analysis of a never-ending flow of meaningful corporate and economic news as well as incessant modifications of our portfolio holdings are now incorporated into our asset management duties.

ABC Funds’ Ten Commandments of Value Investing

Solid Balance Sheets
1. Solid Balance Sheets
We search for solvent companies with ample credit facilities and liquidity, stable to improving bond ratings and debt repayment ability.
Growing Company Revenues
2. Growing Company Revenues
We look for companies with increasing sales and improving pricing power eventually leading to higher profit margins.
Positive Industry Outlook
3. Positive Industry Outlook
We look for companies within expanding industry sectors; this should provide for increasing corporate margins, new business, product innovation and expansion.
Discount to Replacement Cost/Net Asset Value
4. Discount to Replacement Cost/Net Asset Value
We search for companies with undervalued assets and/or trading below replacement costs with brands or products that are extremely dominant in their field of business.
Capable Management
5. Capable Management
We look for companies with strong, experienced management who are shareholder friendly, possessing market savviness with a realistic, yet imaginative, vision for the company.
Consistent Earnings
6. Consistent Earnings
Generally, if a company is growing and consistently beating earnings guidance, it is implicit that management has a strong handle on the company’s operations. This can result in higher earnings multiples and a greater analyst and investor following.
Dutiful Corporate Governance
7. Dutiful Corporate Governance
Of critical importance is that the board of directors are aligned with shareholders. For instance, in an unsolicited takeover battle, we expect the directors to fight for maximum shareholder value as opposed to safeguarding management tenure.
Solid Common Share Ownership
8. Solid Common Share Ownership
We prefer company shareholders who are motivated, not complacent and are not afraid to fight for positive corporate changes.
Quality Assets and Brands
9. Quality Assets and Brands
We put a lot of value on cash generating assets, growing businesses and valuable brands since they can grow a company’s market position, expand a stock’s trading multiples and act as a floor on a common stock price.
Strong Company Cash Flows
10. Strong Company Cash Flows
We look for companies that have growing free cash flows. Free cash flow is important since it can fund mergers and acquisitions, bankroll company expansion, increase common stock dividends and share buybacks and reduce corporate debt.

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