Our process is highly iterative in which we play devil's advocate and try to "kill" our best ideas. Some of the reasons why an idea may be "killed":
- Management integrity / ability
- Strategic advantage not defensible enough
- Lack of accounting clarity
- Lack of identifiable catalyst(s), etc.
1. Screening target universe
- Cash generation ability
- Accounting clarity
- Margin sustenance
2. Digging deeper
- Is growth sustainable?
- Are accounting disclosures appropriate?
- Does this business have defensible advantages?
- Does it have pricing power?
- Is capital deployed appropriately?
- Is there focus on shareholder value?
- Does management stay ahead of competition?
- Is management shareholder friendly?
Practical Risk Management
- Cap industry-wise exposure
- Manage sensitive exposure
- Can position be unwinded quickly?
- Get comfortable with level of speculative momentum.
4. How much should we pay?
- Do absolute valuations suggest material upside (20%+), despite conservative expectations?
- Current valuation should ascribe little or no value to material optionality
- Are technicals (value-based) favorable for entry?
3. Identifying quantifiable optionality
- Can existing assets be deployed elsewhere?
- Can existing moat be leveraged for a new opportunity?
- Is the opportunity quantifiable?
- Can we capture this optionality cheaply?