December 8, 2014

Investment Research Services

Focus Capital, LLC has a long track record of managing investment portfolios and finding stocks with risk/reward characteristics that generate above average returns. The investment process can generate stock ideas appropriate for Growth, Growth at a Reasonable Price (GARP), Income or Value Portfolios. We also generate Short ideas for Long-Short Portfolios. Focus Capitals Institutional clients have portfolios across these equity investment styles and outsource the investment management of their entire portfolios, a portion or just use Focus Capital for idea generation.

Investment Process

Research is central to our approach – fundamental, technical and quantitative research. We link fundamental analysis with technical and quantitative analysis to identify equity securities with compelling risk/reward profiles.

For our clients with Growth and GARP portfolios, we look for good companies with proprietary products and/or special know-how that are at inflection points in their life cycle. The sales and earnings growth rates of those companies begin to accelerate and they begin to exceed expectations on all metrics. Revenue estimates are exceeded and margins expand rapidly, producing positive earnings surprises. The balance sheet gets healthier as each quarter passes. We tend to hold a stock until the company’s higher sales and earnings growth are more difficult to come by, the company’s rate of earnings growth begins to decelerate or the risk/reward characteristics deteriorate.

For our clients with Income and Value portfolios, we look for companies that are cheap on an absolute basis, where we believe fundamentals are positive or about to turn positive and where they have room to grow dividends at a double digit rate.

Fundamental Analysis

In our fundamental analysis, we employ an individual, company by company approach where we focus on:

The nature of a company’s business and the size and growth potential of the industry in which it participates, its competitive advantages, its ability to be a low cost producer, its marketing and sales capabilities, its attitude toward its customers and employees and its balance sheet and profitability.

When a company has practically unassailable competitive advantages they have high barriers to entry and very little competition. If management can constantly stay “paranoid” about the potential onset of competition and avoid complacency and maintain their drive to expand markets, lower costs, and develop new products and services, one may have a company that can go on for years as an outstanding long term investment.

We strive to find companies in open ended, growing markets that have a proprietary edge, are gaining share and expanding margins. They should have the ability to generate minimum internal revenue growth of 15%. These companies tend to exhibit high returns on equity and invested capital without high levels of debt. We assess the company’s business model, the competitive landscape, and the abilities, commitment, and motivation of the company’s management. We place particular emphasis on trying to determine what is driving demand, why a company’s products and/or services are seeing an increase in demand, how much pricing control do they have and whether the revenue acceleration and earnings acceleration are sustainable.

We also try actively to identify catalysts that will cause significant changes in market valuations. Examples of such catalysts and factors include: technological breakthroughs or obsolescence, new product introductions, new management or cost controls, implementation of performance-based compensation plans, restructurings, acquisitions or divestitures, share repurchases, legislative or other legal developments relating to a company’s business or industry, new financings, new analyst or brokerage coverage, restatements of earnings, and changes in accounting methods.

We integrate traditional Wall Street research with extensive “grass roots” research from an information network that is a valuable resource we have developed over our 25+ year involvement with companies across the market cap range.

Screening and Valuation Tools

To assist in finding the best companies that are at inflection points, we use various quantitative and technical screens to screen a universe of over 5000 stocks. Our quantitative screens rank the stocks in order based on earnings dynamics such as: consistency of earnings growth, earnings acceleration, earnings surprise, earnings revisions and return on Equity & Debt levels.

They also take into account stock price relative strength and valuation considerations such as price to sales, price to earnings and price to cash flow ratios. The valuation tools take into account absolute measures as well as relative to historical valuations and to its sector. We want to make sure that we are getting the best value possible for that extra unit of growth. Our Value and Income screens add consistency of dividend payments, the growth rate of dividends and price to book value amongst others.

Short Portfolio Idea Generation

For our clients with short portfolios we also use fundamental, quantitative, and technical analysis but at the opposite end of the spectrum from our long portfolio stock selection. Here we use our technical and quantitative screens to identify high relative valuation companies where on the margin revenues and/or earnings are decelerating and starting to disappoint, where the stock price is starting to roll over and break through support levels and where money flows are decidedly negative and, judging by the institutional shareholder list, money flows could stay negative for quite a long time.

Our fundamental analysis looks for financial statement strains, changes in the competitive landscape, changes in a company’s ability to control pricing, missed product cycles and general deterioration in earnings visibility.