Buying Quality Stocks At A Discount To Fair Value
Johnston Investment Counsel is not driven by short-term trading strategies, but by fundamental analysis. We purchase stocks that not only meet our fundamental criteria, but are selling at a meaningful discount to our target price.
Often times, the market over-reacts to news (either market related or company specific). This can provide an opportunity to purchase quality companies at a discount to fair value. Using a variety of quantitative screens, JIC seeks firms that exhibit:
- Growing sales, cash flow, free cash flow, dividends, and earnings
- Stable and attractive profitability
- Relatively strong balance sheets
- Attractive valuation characteristics (price- earnings, book value, cash flow, etc), and
- A fair value price significantly higher than its current market price.
JIC’s quantitative model ranks stocks on these characteristics and calculates a fair value price (and potential return) using several different valuation approaches. We conduct additional qualitative research on this focus group including: 1) historical trend analysis, 2) Wall Street research, 3) institutional holders, and 4) company reports.
Portfolios are well diversified and will consist of between 40 and 60 individual names. An individual stock position is limited to 5% of the portfolio’s market value. In addition, we limit sector allocations to 30% or three times the S&P 500 weighting (whichever is less).
JIC will sell a security when: 1) the target price is reached, 2) a better opportunity exists, or 3) the stock’s fundamentals begin to deteriorate.