The Crossroads Hallmark Strategy is our core equity investment methodology, which currently has an index beating 10-year track record.
To successfully navigate the stock market you have to understand the stock market is a forum where buyers and sellers of partial ownership interests (Stock Shares) come together to make their transactions. As buyers and sellers come together there is constant pressure for the prices of shares to move towards what is considered fair market value. However, for a wide variety of reasons, many based on greed and fear, prices sometimes move substantially away from fair market values. This price fluctuation raises the risk of paying significantly too much for shares in a company, which could lead to permanent losses, but it also provides opportunities to purchase companies at discounted prices, leading to outsized gains. Besides effecting changes to individual share prices, this pricing fluctuation also tends to have similar effects in broader groupings of companies. Understanding and capitalizing on these market realities allows us to add value to your portfolio.
Our investment process has three key steps that lead us to a portfolio of 35 to 50 positions.
First, we narrow our focus to stock groupings based on the business cycle of our unique valuation models. Our valuation models leverage the fact that during times of economic stress, people typically flee from slower-growing, smaller, and perhaps more cyclical businesses. This will often make their share prices decline much more than warranted, providing a good opportunity to invest in these companies. As the economic recovery proceeds, more investors tend to invest in these shares because of a reduction in fear, followed by a strong acceleration in earnings, typically off very low levels of earning estimates. Toward the end of the economic cycle, these smaller and slower-growing companies tend to become overvalued, while the larger, lower profile companies with more stable growth typically become reasonably or perhaps even cheaply priced. This step helps us focus in areas where we are more likely to find good companies trading at mediocre prices, and reasonable companies trading at cheap prices.
Second, after we’ve determined the economic sectors and size of companies that will benefit from the current phase of the business cycle, we conduct a bottom-up fundamental analysis of the companies to assure that each company we plan to invest in has three characteristics:
- Sustainable, long-term free cash flow generation capability;
- A competent management team that is shareholder-friendly;
- An attractive valuation based on cash flow yields, organic growth rate, and hidden assets.
The third and final step is to diversify the portfolio by investing in 35 to 50 companies in a variety of economic sectors. This type of portfolio achieves our goal of protecting our clients from being too concentrated with anyone company while still providing the opportunity to put forward our best investing ideas.
For a more in depth look at the investment process or to take advantage of this robust strategy please contact Clint Biesinger at Crossroads Investment Advisors.