Philosophy
Summit Investment Partners' investment philosophy is based on the belief that the pricing mechanism of the securities market lacks total efficiency. It has a tendency to over-value some securities and under-value other securities at any given time. Management believes that buying opportunities occur in situations where securities are out-of-favor, price/earnings ratios are relatively low, investment expectations are limited or there is little interest in a particular security or industry.
Strategy
Summit’s Large Cap Value product focuses on sub-sector rotation, rather than sectors, to identify undervalued stocks. The Fund analyzes companies within the sub-sector and buys market leaders.
The Large Cap Value fund also analyzes stocks from a bottom-up approach, looking at the entire Large Cap Value universe, and comparing valuations of the stocks. We consider price/cash flow; price to book value; price to earnings ratio; and price to sales ratio before purchasing a stock. The Fund primarily seeks stocks which regularly distribute dividends.
The Large Cap Value fund focuses on what it feels are quality companies or sub-sectors that are temporarily out of favor, not deeply undervalued. Additionally, the Fund is both art and science: it uses both quantitative and qualitative analysis to find relative value. We examine immeasurable factors such as strength of management team before purchasing that stock.
When choosing stocks, we seek high quality companies with good liquidity trading at reasonable multiples where the possibility of P/E expansion is strong. We focus on companies with a market cap above one billion dollars and a P/E ratio below that of the S&P 500. We then select attractive stocks or sub-sectors: those with attractive price/cash flow ratios or that are out-of-favor. We then narrow the portfolio down to 40-60 names. We are looking for companies that can have an expanding P/E ratio and focus on companies that may have some of the following characteristics:
- consistently meet or exceed earnings expectations;
- rotation from out-of-favor to in-favor sub-sector;
- have hidden assets such as potential spin-offs;
- have share buyback programs or increasing dividends;
- are increasing market share.
Purchasing quality stocks at a reasonable multiple of earnings helps to manage downside risk.
While it is not possible to fully eliminate risk in a portfolio, the Everest Fund employs several tactics to manage risk. First the Everest Fund remains fully invested, limiting its cash position to a 5% maximum. The Fund also limits its position in individual stocks to approximately a 2.5% maximum; this helps to minimize concentration risk in that stock. Finally the Fund maintains sector diversification broadly in-line with its benchmark, the Russell 1000 Value Index.
|