Disciplined Investment Process

Toreador Research and Trading

 

 

Economic Performance: Toreador’s first step is to recast a company’s financial information into  an economic metric called Economic Margin.  Economic Margin is a cash flow based measure that measures the return a company earns above or below its cost of capital and provides a more complete view of a company’s underlying economic vitality.  Economic Margin framework takes into account Cost of Capital, Inflation and Cash Flow to provide a much more accurate representation of management’s ability to create shareholder value and provide comparability across sectors and countries.

Intrinsic Valuation:  When buying a company, investors are essentially paying for its future expected performance.  Traditional models lock into perpetuity are making the assumption that a company’s performance will stay constant forever without facing the effects of competition.  However research shows perpetuity is not economic reality.  Traditional models also do not take into account the concept of sustainable growth – the rate at which a company can grow  based on its internally generated cash flow less investments required to maintain and replace its asset base.  Toreador robust methodology combines all 3 factors, economic margin, fade and sustainable growth, to calculate its intrinsic value.

Momentum: Toreador utilizes both Price and Profit Momentum to invest in companies that are not only undervalued based on intrinsic valuation but also have favorable economic earnings revisions and price movement.   Toreador’s Profit Momentum translates earnings revisions into economic earnings revisions.  Toreador’s Price Momentum is based on historical price movement in the company’s stock. 

Management Quality: Absent a management team that understands how to create shareholder value, a “cheap stock” is likely to get cheaper. The fund’s advisors score each company’s management team on how its strategy links with its economic reality. Wealth creating firms should focus on growing, while firms that destroy wealth should divest and identify core competencies. This process is designed to flag firms  that appear  financially unstable well in advance of their bankruptcies.

Earnings Quality: Companies have an amazing degree of latitude in preparing their financial statements. As a result, a dollar of net income may not represent a dollar of cash flow. The fund’s advisors score the quality of each company’s earnings to determine which are or are not sustainable into the future