Delving into our analysis, the concept of relative valuation is integral to our investment process. We apply relative valuation techniques to all of the securities we review, from asset class down to individual stocks. Our overall process begins with reviewing the relative valuation of stocks vs. bonds.  Valuation, along with the direction of interest rates, investor’s sentiment, seasonality, the technical direction of the market and the economic outlook, helps us determine our asset allocation. As part of the process, we review the international equity markets and emerging markets. As countries outside the US grow rapidly, they can experience strong asset flows into their markets, driving the markets higher.  

Within the US, we decide if there is an opportunity to profit through investing in any particular style classification.  We define our classifications as: large vs. small, growth vs. value and cyclical vs. non cyclical. The major inputs into this decision are economic growth, the trend in interest rates and relative valuation. Our bias toward cyclical or non cyclical will play a role in our next decision, sector allocation.

 The determination of sector and industry exposure is based on relative valuation, our economic outlook and asset flows.  We have identified the appropriate valuation methodology for all the sectors and industries.  Relative price/sales, price/book, price/cash flow and price/earning are the methodologies we employ. We pay close attention to applying the appropriate valuation methodology to each security. Too many firms use a very narrow definition of value, looking only at one valuation method.  While it keeps things simple, it may lead to the incorrect conclusion that a security is cheap, when in fact, it may actually be expensive. 

In addition to low valuation, we seek an improving fundamental situation.  We believe that successful securities have certain characteristics in common. These characteristics include reasonable valuation, strong revenue and cash flow growth,  improving earnings per share (EPS), solid fundamentals and positive relative strength. Once a security satisfies all of these conditions, we will consider it for purchase.

Portfolio construction is also very important to us as we want to sufficiently diversify the portfolio. While we would always like to own the best performing securities, we know that is an unrealistic thought.  Our goal is to avoid securities that do not produce a positive return.  Typically, a few poor performing securities can drag down the performance of a portfolio of good performing stocks.  If a security disappoints us in any way, we will sell it immediately.