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- Blending Quantitative and Fundamental Analysis
We evaluate companies through our own rigorous analysis process based on our experience in the following areas:
Financial statements distort economic reality and our first step is to recast a company’s financial information so it reflects a firm’s true performance, EM.
Common multiples such as P/E, P/B, and others fail to explicitly deal with profitability, growth, risk, and competition. For that reason, we explicitly address each of these issues in our discounted cash flow model to understand the intrinsic value of each company in our universe.
Absent a management team that understands how to create shareholder value, a “cheap stock” is likely to get cheaper. We score each company’s management team on how its strategy links with its economic reality. Our process is designed to flag firms such as Enron and MCI as wealth destroyers well in advance of their bankruptcies.
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. We score the quality of each company’s earnings to determine which are or are not sustainable into the future.
After applying these factors to our universe of stocks, analysts review each company across various dimensions, such as:
The analyst role is to look at these and other factors not captured in simple accounting numbers to find reasons not to buy a company that looks good “by the numbers”.
We believe our process is a unique and powerful differentiation that sets Toreador apart from any other investment advisor.
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