A Disciplined Value Investment Philosophy
HCM’s value investment philosophy is to invest in quality businesses that we believe have sustainable competitive advantages, at times when markets have undervalued their shares relative to our established quantitative measures. We have deployed this discipline through multiple market cycles for 25 years. HCM believes:
- Companies with sustainable competitive advantages will outperform the broad market over time.
- Market volatility can be exploited to purchase companies at a discount to their intrinsic value.
- A consistent adherence to a discipline based on fundamental valuation techniques will produce results.
Step One: The HCM Qualified Investment Universe (QIU)
We analyze factors contributing to a candidate company’s sustainable competitive advantage:
- Is the company an industry leader or does it dominate a certain niche market?
- Has management been prudent and proactive over various economic cycles?
- Does the company have pricing power with customers?
- Does the company have purchasing power with suppliers?
- Do barriers to entry exist for prospective competitors?
- Does the company have a strong brand/franchise with brand loyalty?
- Does the company deliver excellent products or services?
- Does the company provide outstanding customer service?
- Does the company have sufficient financial flexibility?
If a company possesses the correct blend of the above criteria, it is concluded that the company does maintain a sustainable competitive advantage and is added to the HCM QIU.
Step Two: BUY DISCIPLINE
We assign a fair market value for each security in the QIU, using a discounted cash flow method, price to sales ratio and price to book ratio. Our team purchases the most undervalued securities in the QIU, subject to each portfolio’s concentration parameters.
Step Three: PORTFOLIO CONSTRUCTION
Focused Advantage Value Equity Portfolios:
20 stocks, each with a target of 5% of total portfolio value
Rebalance boundaries of 2.5% and 10% per position
No sector constraints. 25% per industry maximum at cost
Advantage Value Equity Portfolios:
45 stocks, each with a target of 2.22% of total portfolio value
Rebalance boundaries of 1.5% and 2.9% per position
25% per sector and 10% per sub-industry maximums at cost
- Sell all shares if a company no longer possesses sustainable competitive advantage.
- Sell all shares if the price exceeds fair value by a range of 1% to 20%.
- Trim position if risk and diversification parameters are exceeded.