Large-Cap Value Strategy : Selection Process

The key to strong performance lies in staying flexible. Our collaborative process allows us to take advantage of investment opportunities when they present themselves.

Equity Selection Process
 

Step 1: Identifying opportunity

Promising investment ideas can come from anywhere. Our analysts have developed expansive networks of idea sources. They read widely; attend industry conferences and talk to customers, suppliers and competitors of portfolio companies.

Our analysts are generalists, yet each has multiple circles of competence. They use their expertise to identify those characteristics that we have found maximize our odds of success. The importance of these characteristics can carry vastly different weight depending on sector products, economic cycle, competitive landscape, and more. However, quantitative, qualitative, and macroeconomic factors are almost always taken into consideration.

 

Step 2: Business analysis

Once a potential investment has passed our initial criteria, our analysts begin a deeper qualitative study to ensure the company's specific characteristics meet our qualifications. Through a thorough review of company financials, operating and investing track records, competitive positioning, and often a personal meeting to assess the management team, we are able to determine how the investment opportunity stacks up against our discipline.

We believe that the value of a business is a function of the cash that its owners will be able to take out of the business over time. We look for businesses that:

  • Have understandable products and services
  • Hold strong competitive positions
  • Are capable of generating excess cash flow
  • Employ honest, intelligent management
 

Step 3: Business valuation

In conjunction with our qualitative due diligence, we forecast a company's free cash flow using various economic and company-specific scenarios. We identify and focus on the business' key drivers with an understanding that two or three assumptions often make or break an investment. We frame the business' reinvestment opportunities and likely uses of excess cash flow, paying careful attention to management's understanding of appropriate capital allocation. Our analysts then assign an estimate of what an informed buyer might pay to own the entire company outright.

Objective value

We use a five-year DCF model with a 9% equity discount rate. Base, high and low case business value estimates are determined.

Targeted value

When a stock price is at least 30% lower than base case value, we're interested.

If we like the business, but the stock price does not reflect the discount we'd like to see, we will put the company on the "on-deck" list. As long as the objective value of the company remains stable, a reduced stock price may move the investment into the range in which we'd consider a purchase.

 

Step 4: Writing the company report

The sponsoring analyst summarizes the recommendation in a written report for review by our Investment Team. The report provides a detailed investment thesis, supporting rationale, an industry overview, and a summary of our assumptions and the key risks to the business. Areas of focus include:

  • Sources and sustainability of competitive advantages
  • Potential weaknesses and vulnerabilities
  • Understanding of consensus views and where we differ
  • Estimated valuations
  • Key drivers that will make or break the investment
  • Porter's Five Forces Analysis
 

Step 5: Vetting the investment idea

All members of our Research Team vet each idea, asking tough questions rooted in the principles of the Weitz Way. Recommendations are either:

  • Purchased
  • Placed on the on-deck list awaiting a more attractive price
  • Determined to require additional work and put on the watch list
  • Dismissed altogether
Selection Debate
 

Step 6: The portfolio managers

Ultimately, decision rights reside with our portfolio managers. While research and maintenance are a collaborative effort, portfolio managers are accountable for where and how much to invest.

Our managers are responsible for weighing purchase considerations, including the price-to-value ratio of a specific stock (as well as the ratio compared to other potential investments), range of potential outcomes, and exposure to similar risks portfolio-wide.

In addition to purchasing, all of our portfolio managers have ongoing portfolio management and risk management duties, including:

Portfolio Management

  • Maintaining concentrated portfolios
  • Investing with a long term (5-10 year) investment horizon
  • Remaining benchmark agnostic
  • Willingness to hold cash when appropriate
  • Emphasize ongoing collaboration between analysts and managers including quarterly business valuations and daily communication with analysts

Risk Management

  • Defining risk as permanent loss of capital – not price volatility
  • Considering risk at every stage
  • Adherence to Ben Graham's "margin of safety"
  • Assessing special risk factors that may affect multiple holdings
  • Avoiding hard limits on position sizes
  • Defining 5% as a "full" position
 

Our Exit Strategy

Diligence is equally important when it comes to selling any given stock. Our goal is to maximize return without taking unnecessary risks. Our specific standards for selling investments are:

Standards for Selling