Investment Criteria

INTRINSIC VALUE GROWTH

Our belief is that seemingly undervalued companies that cannot grow at above-average rates tend to retain their discounts. On the other hand, those that can compound value per share at a double-digit pace for multiple years allow us the luxury of extensive holdings periods. More important than reported earnings is cash generation, which can be used to reward shareholders through dividends, share repurchases, debt reduction, or acquisition. A company must be capable of earning returns above its cost of capital so that cash generated can be continually reinvested to enhance value. We also look for opportunities in companies that can unlock value by liquidating or putting to better use underutilized or unrecognized assets.

CO-INVESTED MANAGEMENTS

NewSouth attempts to invest in companies directed by honest, capable, and motivated leaders. We seek to identify uniquely-skilled operators and capital allocators who are appropriately incentivized, and we examine corporate governance carefully to ensure that it is conducted with the goal of maximizing shareholder value. We believe that executive compensation should be directly tied to increases in per-share value and prefer to partner with managements and directors who personally own significant stakes in their companies.

CAPITAL PRESERVATION

Our superseding goal is to prevent the loss of our clients' capital. To do so, we begin with an analysis of a company's financial statements with an eye for conservative capital structures and accounting policies. We require a sound balance sheet that demonstrates the ability to comfortably meet all future fixed costs, and we search for liabilities that may reside off the balance sheet. In order to minimize dependence on the capital markets, we favor internally financed business plans. Operationally, we look for sustainable, competitive advantages and barriers that discourage new competition. And finally, but most importantly, we invest only when a security's price is significantly below what we deem to be its intrinsic value. Depressed security prices allow a margin for unanticipated risks and diminish the likelihood and magnitude of permanent capital loss.

DISCOUNTED VALUATION

To qualify for purchase, a security must be available at a market price significantly below our estimation of its intrinsic value. Additionally, we want to understand why disparities exist between our valuation of a security and its market price. We find that undervalued companies tend to be out of favor, misunderstood, simply under followed, or that undervaluation is the result of the market's overreaction to bad news. As sentiment begins to change or if a company begins to merely attract more attention, the valuation discount should close. At times, we simply have a longer time horizon than the market and are willing to endure short-term price fluctuations to realize ultimate value.