Disciplined Investment Process

The process is based significantly upon in-depth conversations and meetings with hundreds of companies during the course of a year. No portfolio position is established without the benefit of a meeting or extensive interview with senior management. Our research is internally generated and supplemented with external resources. Mary Lisanti, CFA, is the sole decision maker on portfolio decisions.

We screen 5,500 companies with market capitalizations of less than $2 billion. The objective is to efficiently narrow the universe to a list of potential purchase candidates (100-300) representing the best relatively attractive companies. The screening process identifies companies with the following characteristics:
  1. Improving Fundamentals: projected earnings growth of 15% or better, rising returns on invested capital and discounted valuations based upon P/E to forecasted growth.
  2. Positive Recognition and Ownership: The potential for positive changes in investor psychology, a high level of management ownership, a low level of institutional ownership and lower level of Wall Street research coverage.
  3. Implied Growth: Signs of future positive inflection point in a company’s growth curve such as; new management or new product introductions.
  4. Industry Opportunities: A secular change in the supply/demand characteristics of an industry.
  5. Earnings Surprises: A series of positive earnings surprises (expressed by positive changes in forward consensus earnings estimates)
Once a company has passed through the firm’s rigorous investment research, the portfolio construction process incorporates the firm’s insights into developing demographic, sociological, economic and political trends. These developments are the 10-15 “themes” embedded in the portfolio and answer the important question, “Why this stock at this particular time?” Themes are derived from experience as well as observations of how macro and micro economic developments intersect. These insights are supported by a variety of trade publications, industry periodicals, as well as relationships with corporate management teams. Several “think tanks” or consultants can be consulted on important secular trends.

The decision to include a company in the portfolio is primarily based on an understanding of the company’s strategic vision in the context of today’s environment, as well as an assessment of management’s potential to execute its operational plan. Furthermore, the objective is to identify companies that are uniquely positioned on the leading edge of the “change curve”. Price targets are set along with an investment thesis around each holding in the research process. The level of appreciation potential will vary based on the profit outlook, but in general the majority of our investments have at least a 25%-50% return potential over a 12 to 18 month period, in a market neutral environment.

Initial positions are ½% to 1 ½% based on overall conviction. Positions are typically trimmed at 3%, with a maximum weight of 5%. Average trading volume and liquidity are closely monitored.

The portfolio manager is benchmark-aware, not benchmark-driven. At the sector level, a maximum weight of double the benchmark for major sectors and triple the benchmark weight for minor sectors have been established. There are no minimum sector weights. Cash levels are less than 5% and there is no use of derivatives or ETF’s. At theme level, Lisanti maintains a 25% maximum weight for the small cap growth strategy.

Stocks are sold for the following reasons: