Our investment philosophy is based on the belief that active, fundamental research adds value to the investment process. The emphasis is on internally generated, company specific research. Research is conducted in the field as well as in the office. Contact with company management is an essential component of our research process. Collectively, analysts and portfolio managers conduct thousands of management interviews annually.
Cornerstones to our philosophy include the belief that over time stock prices tend to follow earnings progress and that stocks must be purchased and owned at reasonable valuations. We tend to own companies we believe can generate long-term, sustainable earnings, managed by qualified professionals capable of executing a well conceived strategic plan. We look for businesses that can generate returns on capital in excess of their cost of capital over a business cycle.This philosophy is followed throughout the firm and across all strategies. Differences occur due to capitalization and style (growth vs. value), rather than overall philosophy.
In our growth strategies, we seek to own companies that have above average secular growth prospects and competitive advantages that will allow them to earn superior rates of return on capital over a business cycle. The competitive advantages may be proprietary products, differentiated value added services, or patent or process protections. We are valuation sensitive, and willing to be patient in our purchase decisions. Ideally, we prefer to buy quality companies that are out of favor for short-term reasons, rather than chase the current market favorites. Our investment time frames are typically 2-4 years, and we prefer companies that are entrepreneurial in spirit with significant management ownership.
In our value strategy, we believe that the market overreacts, pricing many value stocks too low relative to their intrinsic value, and over time, reversion to the mean can lead to better returns in value stocks. In addition, brokerage firms often neglect small cap value stocks, resulting in an inefficient market. An important initial screen used is price-to-book, wherein we typically only consider companies as purchase candidates with a P/B of less than 3 times. Other purchase criteria include price-to-sales and return on equity, which are expected to improve.For all strategies, we tend to sell stocks when: 1) our price objectives are reached; 2) fundamental conditions have changed so that future earnings progress is likely to be adversely affected; or 3) we are fully invested and an attractive, new opportunity causes us to sell a current holding with less appreciation potential.