Investment Philosophy Summary
SECURITY CAPITAL MANAGEMENT
Where Rigorous Fundamental Analysis Merges with Price Sensitivity In Security Selection
Security Capital Management (SCM) is a value-oriented Registered Investment Advisor which employs traditional fundamental analysis in choosing financial securities investments. However, SCM will not buy a security just because it appears inexpensive using statistical measures. The security must exhibit some sort of earnings growth potential either through new or existing market-leading products or services or as a turnaround story. There exist many "cheap" stocks which tend to remain that way, because they are poorly run, have inferior products or services, or are in no-growth industries. We try to avoid these companies.
Security Capital Management differentiates itself from other GARP, or Growth at a Reasonable Price, managers by being extremely price-sensitive as to both entry and exit points of securities it buys. Many money managers rush in to buy a market-leading company when its stock price begins to falter. As the stock continues to fall, they buy more and in effect average down their cost basis. We at SCM know from hard-earned experience that once a security begins to fall, its price usually ratchets down until it reaches some sort of price stability. We employ a Watch List to track appealing companies whose stock prices have begun to flag. Using a combination of fundamental and technical tools as well as patience, we monitor these stocks until we are confident that further downside risk is limited and that there is far greater upside potential.
Price sensitivity coupled with fundamental analysis aid the portfolio manager in avoiding situations which occurred during the "tech bubble" of 2000-2002. Through the late 1990s, as tech stocks surged to unprecedented levels, the market mantra was "Buy on dips." This admonition worked well until 2000, when investors, with the help of Federal Reserve monetary tightening, woke up to the fact that many tech stocks were grossly overvalued relative to their earnings or earnings potential. Prior to the bursting of the bubble, patient value investors underperformed the market and most tech investors, unable to justify the lofty levels of tech stock prices. However, when the dust cleared in late 2002 and early 2003, they began to find value in many of the stronger tech names. The businesses of many of the tech leaders like Microsoft and Intel had not changed. They were still the dominant forces in their industries with excellent earnings and cash flow. What had changed was that their stocks were now selling at rational fundamental levels, their prices had stabilized, and they were out of favor with the herd mentality of Wall Street. In other words they became the type of stocks SCM searches for.
Security Capital Management uses the same rigorous fundamental analysis coupled with some technical analysis to determine when a stock it owns has reached full value and a possible inflection point at which it might begin to drop. When SCM purchases a security, it establishes an initial target price. This price, once reached, becomes a mere flag for its portfolio managers to revisit the stock and the company to make a determination as to whether under current conditions the stock has still some room for appreciation. Once again SCM applies a patient discipline. It will not sell an excellent company whose stock has appreciated unless it has found a relatively more attractive security or the fundamentals of the security have begun to deteriorate.
The following summarizes Security Capital Management's security selection process:
- Look for stocks which appear inexpensive and financially sound based on traditional fundamental parameters like (but not limited to)
• Debt to Capital
• Price to cash flow
• Price to earnings
• P/E to prospective earnings growth rate
• Price to sales
• Price to book
- Whose prices based on fundamental and technical analysis appear to have bottomed and reached a positive inflection point
- Stocks with good or improving earnings growth potential
Security Capital Management's disciplined approach combining strong fundamental analysis with acute price sensitivity in buying and selling securities differentiates SCM from many of its peers and provides a recipe for superior investment performance.
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