Looking for macro exposure based on monetary and business cycles and on corporate exposure segmented as follows:
UNDERVALUED GROWTH
DEFINITION
Total Addressable Market Expansion
Market Share Expansion
Combination of Both
Long Term Oriented Visionary Management
ASSUMED ALPHA SOURCE
Investors Undervalue Companies With Temporary High Investment Rate
Markets Overestimate Opportunity Cost of Holding Stocks Paying Low or No Dividend and Therefore Underprice Them
RISK CHARACTERISTICS
Higher Volatility Than “Strategic Assets” and “Dividend Increase” Strategy
Once Discovered, the Stocks in This Strategy Might Become Momentum Plays (Investors’ Expectations Overshooting)
DIVIDEND INCREASE
DEFINITION
Industry Consolidation Allows for Excess Cash Flow Generation on Lower Capex and Better Pricing
Change in Business Model Requiring Less Capex
Cash Accumulation on Balance Sheet Not Necessary for Operations
Combination of Above
ASSUMED ALPHA SOURCE
Anticipation of Increased Cash Return to Shareholder Before It is Signaled by Management
RISK CHARACTERISTICS
Lower Volatility Than the Undervalued Growth and Recovery Strategy
RECOVERY
DEFINITION
Corporate Restructuring/New Management
Industry Growth Resumption
Industry Consolidation Improves Pricing
New Credible Lines of Products Are Introduced, Erasing Market Share Losses
Combination of Above
ASSUMED ALPHA SOURCE
Adaptive Expectations: Market Undervalues Positive Changes Coming Off Negative Phase of Corporate History
Some Positive Underlying Changes Are Not Captured Yet in Expectations as They Might Be Qualitative or Not Surfacing Yet in the Income Statement
RISK CHARACTERISTICS
Higher Volatility Than “strategic Assets” and “dividend Increase” Strategies, but Ideally Lower Volatility Than the Market as Past Difficulties Are Priced in
Relatively High Volatility Component Explained by Specific Company Risk: Limited Correlation With Market
STRATEGIC ASSETS
DEFINITION
Brand Trusted by Customers
M&A Target
Owner of an Infrastructure That is Difficult to Replace or Bypass
ASSUMED ALPHA SOURCE
The Value of the Assets Goes Up Gradually as Replacement Cost Goes Up Risk of Disruption From New Technologies is Overestimated or Brought Forward Too Much (Undervaluation)
RISK CHARACTERISTICS
Volatility is Moderate, Recovery After Market Correction is Usually Fast, Lower Volatility Than the Undervalued Growth and Recovery Strategy
