Our fundamental belief at South Atlantic Capital is that buying undervalued stocks is not only the key to strong investment gains but is the best way to reduce risk of principal loss for clients, creating a "margin of safety" or cushion against overly optimistic earnings expectations, negative unexpected developments, or the effects of market swings. Such companies are able to find a seat if and when a weakening economy or unexpected shock to the financial system causes the music to stop playing. We do not attempt to time the market, nor do we try to predict economic or market changes over the short term. We think these pursuits would be a distraction to us and most likely a disappointment to our clients.
Conventional investment thinking, in our opinion, often fails investors with too much emphasis on diversification and asset allocation at the expense of thoughtful investment selection. The asset class that has historically delivered the strongest returns for most individual investors is equities. So, we try to grow a client's net worth over time, adjusted for inflation, by investing in a smaller set of carefully selected companies, in a risk-averse way. We look to invest at reasonable prices, trying to buy a dollar for $0.70. We will sell our companies when they appear overvalued or when a better investment presents itself.
The only way we feel we can accomplish this strategy consistently is to limit our investments to companies whose prospects we clearly understand. If a stock price drops below our cost, we typically are more interested in buying than selling. Without having thoroughly researched a company and its competition, many investors are prone to sell when they should be buying. We will retain cash in the absence of good ideas. Our approach revolves around the belief that a company's assets and its enterprise value can be evaluated independently of the stock market. Investing in companies that are undervalued provides fundamental advantages. Over the long term, stock prices reflect the growth of corporate earnings plus dividends. Speculation adds or subtracts little, during short time periods, and does not change the basic measure of value. We look for companies that will prosper for the foreseeable future based on a sustainable competitive advantage. This results in holding investments for 3-5 years or longer.
We believe our investment philosophy and long-term orientation has been the key to our success over time. While we can't be certain that what investors consider popular today will be popular tomorrow, we can be confident that the stock market will ultimately recognize a company's true value.
Conduct a fundamental analysis of each company
Seek companies that are priced to offer a margin of safety to protect against adverse changes in economic circumstances
Focus on well-managed and competitively entrenched companies
Emphasize strong balance sheets, free cash flow, and high return on equity
Deliver long-term results that are less dependent on the economy due to a disciplined process of identifying mispriced and well-financed companies
Construct a concentrated (“high conviction”) portfolio