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Brazos Overview: Process
We believe the market is inefficient. Our goal is to identify earnings growth in smaller capitalization companies before it is reflected in the stock price. We employ a fundamental research approach to investing, driven by intense company-specific research including on-site visits, interviews with management, customers, suppliers and competitors. Through our focus on earnings growth we identify companies we believe have the most upside potential for growth.
The Portfolio's focus is on quality companies whose growth and profit potential are not yet fully recognized by investors. Our investment process consists of three essential phases: screening, bottom-up fundamental research, and stock selection. Conducting screens on capitalization, earnings growth, and growth criteria restricts our investable universe to approximately 1,000 prospective stocks worthy of fundamental analysis. Bottom-up fundamental research is then conducted to uncover quality, valuation, and catalyst criteria in an effort to further narrow the environment to approximately 200-400 quality companies with accelerating earnings growth. The final component of our process revolves around stock selection and results in a diversified portfolio of 40-60 high quality growth companies.
This long facilitated investment process incorporates three separate steps: 1. Idea Generation, Company Specific Research: Step One is fundamental company research, which is the most critical component of the effort. This ongoing process includes screening companies for capitalization, accelerating earnings and growth criteria, valuation and technical characteristics in an effort to identify those that meet our purchase criteria. This screening process includes financial analysis, company visits and calls, third-party confirmation, on-site property visits, and valuation monitoring, to constantly generate potential purchase and sale candidates.
2. Idea Confirmation: Idea Confirmation is the second step of the investment process. This step involves risk management through further investigation of the company’s fundamentals as well as meeting proprietary technical screening guidelines. The investment team believes quality candidates possess competitive industry positions, pricing power, balance sheet strength, and a proven management team. Within this universe, prospective companies are identified as having strong basic measures (P/E, P/FCF, P/S, EV/EBITA), an attractive price relative to earnings growth, expanding margins, increasing attention from Wall Street, and accelerating earnings. Each investment considered is held up to rigorous standards. 3. Portfolio Manager Conviction, Stock Selection: Portfolio Manager Conviction is the final step involved in managing the Portfolio. The portfolio is specifically managed by a seasoned portfolio manager/analsyt and supported by a team of research analysts who evaluates the companies within a given industry, and are ultimately responsible and accountable for the stocks they sponsor going into or coming out of the portfolio. Decisions are made in the context of the investment ideas proposed by the other analysts, and the consideration of new stocks relative to the attractiveness of other stocks in that analyst’s particular sector. Upon introducing a new idea to the team, the stock sponsor is required to formally write-up the stock recommendation, create internal EPS, and set the price target for that stock. Portfolio managers work with analystrs on trading tactics and determine stock weighting in the portfolios.
Strict valuation disciplines are employed in order to pay the appropriate price for companies. In addition to detailed financial analysis, one-on-one meetings with companies’ management teams are critical to the evaluation process, and remain an ongoing part of the process for as long as a security is owned. Sector work is performed to validate/confirm the results of the adviser’s bottom-up effort. If fundamentals confirm their bottom-up analysis, the manager would employ top-down analysis to enforce a “reasonable” limit to any one industry versus weightings in applicable benchmarks. The Brazos Funds are diversified across 10-15 sectors at all times to mitigate risk. The maximum held in any one sector is 25%. The Brazos Funds are “fully invested”, cash is not typically reinvested automatically; instead, the adviser looks for good ideas to replace what has been sold.
Selective Portfolio Construction Brazos evaluates companies based upon the following characteristics:
price targets set
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