Large Cap Commentary – July 2013
Buying the right stock is obviously a critical component to investment performance. However, perhaps, more essential to performance is determining when to sell a stock. At Argent, we have several tools which aid us in this process. First, we utilize quantitative screening methods led by Senior Research Analyst, Kirk McDonald. Kirk’s screens highlight traits that are more or less favorable for an individual stock. When Kirk’s quantitative screens indicate deterioration within a stock we own, we dig in to figure out if anything untoward is happening with the company’s fundamentals. Second, we also have a formal scoring mechanism in place which is used to judge stocks based on investment criteria. This scorecard has been created over the course of several years by John Meara and Ying Ko. Together, these two tools are designed to track how our stocks are progressing and help remove emotion from our investment process.
Every quarter we analyze the results of the stocks in our portfolio. We have a long-term goal for each of our positions and the key drivers for those companies which should help them reach their goals. We compare this quarterly snapshot to our long-term goal and ask ourselves whether each company is tracking per our expectations. We call these “short putts”. Ideally, every quarter a company would post results that are in line or above our expectations and better than consensus. Instead, as in most aspects of life, things happen. For example, during any ninety day quarter there could be a snowstorm or a spike in gasoline prices or a black out at the Super Bowl.
Because of those idiosyncrasies we have to determine whether a company was affected by things beyond its control or whether the company is making excuses and truly not meeting its “short putts”. To aid in this determination we spend countless hours listening to conference calls of competitors, suppliers and buyers in order to get a complete picture of the operating landscape for the companies in our portfolio. We also spend a good deal of time talking to people in the industries we own – our Main Street Contacts – to gauge their business climate.
As always, we focus on favorable odds. We look at the valuation of the companies we own and contrast that against the potential upside we see in the stock. We continually ask ourselves whether we are getting paid to hold the position in our portfolio. With a concentrated portfolio of thirty to thirty five stocks, we demand a compelling risk/reward for each stock we hold.
However, even with all of these checks and safeguards in place we still get fooled on occasion. As we have said many times before, we do not have a crystal ball and unfortunately, a few stocks do not perform as we had expected. When this happens, we honestly ask ourselves how we can improve our investment process – what didn’t we see or anticipate? We call this our “Debrief” and our goal is not to repeat a mistake twice and continuously strive to improve our process.
Through thorough research, tested investment tools, continuous monitoring and a team dedicated to performance we believe we have crafted an investment process for the long-term, focusing both on the right companies to buy and the right times to sell.
As always, we appreciate your interest in Argent Capital Management and hope you will mention our name to others who might be interested in our stock management services.
Senior Portfolio Manager
Views expressed herein represent the opinion of the portfolio manager as of the date above and are subject to change.