Industries: We invest in industries because the majority of the stock prices in an industry advance and decline in unison, thereby exhibiting the same price pattern. Studies show that 60-70% of a stock prices’ movement is due to its industry.
A major well-defined downtrend: We look for the majority of the stocks in an industry to exhibit a well-defined, 5- to 20-year downtrend. This long-term downtrend plants the seed for the next upturn.
Upside breakout: We look for the majority of the stocks in this industry to breakout from this well-defined, long-term downtrend on increasing volume. This breakout strongly suggests a significant turnaround is developing. During this breakout we often see the following factors that help validate this turnaround: new management, write-offs, layoffs and a new focus.
Value and quality: We search for industries breaking out of downtrends because they are typically undervalued with low price-earnings ratios, favorable book values and other favorable fundamentals. The best-managed companies often lead the way.
Growth: The majority of the stocks within these industries tend to report earnings that are better than Wall Street analyst estimates. After years of underperformance this breakout and growth creates the upside momentum that typically leads to a powerful, long-term advance.
Insider buying: The final characteristic we look for is insider buying. We look for an industry in which insiders are buying, management has significant ownership, the corporation is repurchasing its own shares or buyouts are occurring in the industry. This further validates value and growth potential.
Our strategy is to select stocks from within industries that meet the above criteria. For each client we maintain a diversified low-turnover portfolio. Typically 6-15 different industries emerge during each cycle. The maximum that we invest in any one stock typically does not exceed 5% and no more than 20% into any one industry. An overall equity portfolio may consist of 25-40 stocks.
Summary: We are looking for stocks that are part of an industry exhibiting a major turnaround from years of underperformance with bullish fundamentals in place. The likely outcome is that these stocks will emerge out of their long-term downtrend, and pivot into a major long-term expansion. That has been our firm’s conservative strategy for over 40 years. Investing made simple with proven results and reduced risk.
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