At Eukles Asset Management, we use a proprietary screening process to identify truly great companies. Our initial screen consists of 11 criteria:
- A sustainable competitive advantage or economic moat
- Inflation resistance
- High, consistent return on equity
- High, consistent return on capital
- Predictable growth in top-line revenue
- Predictable growth in earnings per share
- Predictable growth in cash flow
- Predictable growth in book value
- Minimal capital spending needs
- Manageable long-term debt
- Management with a vested interest in the company’s success
If a stock is able to pass each step, we add it to our Watch List. Once a stock is added to the Watch List, we move on to step two in our process – calculating the stock’s intrinsic value.
We calculate the intrinsic value of our prospective target investments from three different perspectives, relative value, long-term value and sustainability. Then, since predicting the future contains many unknowns, we discount the intrinsic value by a “margin of safety” which serves as a cushion in case our assumptions turn out to be flawed. It is this value that we use to determine whether an investment is suitable for our portfolio.
Finally, we add a timing and industry strength component to our analysis. We search for industries that have favorable tailwinds, as even great companies can be hampered by unfavorable industry trends. Investing in a company whose industry is facing a difficult environment is analogous to swimming upstream – it can be done, but it’s difficult. Therefore, if the industry winds are not blowing favorably, we wait to invest until conditions improve.
We make the decision to buy if the stock meets the criteria listed above. Namely, if the stock makes it through the initial screen, is trading below our margin of safety price, and meets our timing and industry strength parameters, we add it to the portfolio.
We will sell a stock in our portfolio if:
- The market price reaches our target price of 100% of its intrinsic value.
- If industry metrics begin to deteriorate to the point where the company will be facing major headwinds as a result of conditions beyond its control.
Investing involves risks including possible loss of principal. There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes.