Investment Process
In searching for
ideas, we draw upon our experience to identify investments where we have a competitive
edge. This edge may be the result of sifting through inefficient market niches and
gathering information on companies that are not yet well known or from developing opinions
on businesses that are contrary to prevailing thinking. We also investigate corporate
events that often signal undervaluation. We look for companies with predictable businesses
that generate free cash flow and that have competent and motivated management teams.
Identifiable catalysts are required to cause the market to reassess the investment’s
prospects.
Once investment opportunities are identified, we perform intensive due diligence, which
includes analyzing regulatory financial disclosures and speaking with industry experts,
other investors and company management. Our goal is to know more about the companies in
which we invest than do other outside investors. The information that we gather is used to
create detailed five-year projections of the companies’ accounting statements.
These projections are used to set Cardinal’s buy and sell prices for an investment.
Our buy price is based on a high discount rate and conservative multiple of cash flow. A
lower discount rate and a more aggressive terminal multiple determine the sell price
target. The multiple will vary based on the consistency and quality of the cash flow as
well as on multiples of publicly traded competitors and recent transactions. We will also
sell our investment if the business model becomes unpredictable or more
attractive investment opportunities exist elsewhere.
Our portfolio is constructed through consensus decision making with one analyst retaining
primary responsibility for following each company. Cardinal’s portfolio of
approximately 50 stocks is weighted towards our best ideas while being broadly diversified
across industries. |
