Our investment process begins with an analysis for quality in three areas of a company: Financial, Business and Management. Clarkston utilizes a proprietary free cash flow model to assess and place a risk adjusted “value range” on every company in our portfolio. When the price of one of our bench companies falls within our value range, we initiate a position. The size of this position is dependent upon the discount and where the price lies within our value range. We are constantly monitoring our bench companies and make periodic updates to values based on new information that conform to these principles:
FINANCIAL Principle: Consistently high Cash Returns On Net Operating Assets (CRONOA™), solid free cash generation, and strong balance sheets are characteristics typically found in companies that possess competitive advantages. We utilize extensive research to identify companies that exhibit these financial characteristics.
BUSINESS Principle: With our business principle, we focus on understanding the business, identifying the source of the competitive advantage, and determining if that competitive advantage is sustainable. To accomplish this, we rely on a myriad of sources including industry publications, financial statements, and dialogue with company management.
MANAGEMENT Principle: In order for a firm to have future success, it must be operated by capable management teams that understand the sources of their competitive advantage, and allocate capital in a manner that preserves and enhances their industry dominance. We assess the management teams’ competency to ensure superior execution, optimized capital allocation, and sustenance of their industry dominance. Management honesty and candor is a fundamental requirement.
There are three circumstances that would lead us to sell a portfolio holding:
- We will sell a company if it no longer meets our quality investment principles.
- We will sell a company if its market price achieves a level where the company can no longer support its valuation.
- We will sell a company if we are presented with an investment opportunity that is demonstrably better than an active holding.