Kevin Callahan is the Lead Portfolio Manager of the Century Large Cap Growth strategy. Lanny Thorndike is the Co-Portfolio Manager. The Portfolio Managers conduct fundamental, bottom-up research analysis on existing and prospective holdings. Century’s equity analysts are leveraged for affirmation and confirmation on companies they are analyzing. The equity analysts have dedicated GICS sector coverage. We believe that this dedicated coverage leads to strong knowledge and experience which enhances the Large Cap Growth investment process.
The key tenets of the Century Large Cap Growth investment philosophy are:
- Invest in solid, high quality businesses to help mitigate risk
- Be contrarian at purchase; exploit the herd mentality
- Apply exhaustive fundamental research targeting growth, profitability and valuation
- Express bets in a high conviction portfolio
Investment Approach & Universe
The Large Cap Growth investment approach is fundamental, bottom-up. The investment style is traditional Large Cap Growth. The strategy’s benchmark is the Russell 1000 Growth index. The investment universe typically consists of roughly 900 companies that have a market capitalization greater than $4 billion at purchase and trade on a U.S. stock exchange.
The Fundamental Research step of the investment process is perhaps the most important. This is the phase where we dig deeply into the fundamentals of the company and the industry in which it operates. The Large Cap Growth strategy invests primarily in two types of investment opportunities:
1) “Core Growth” companies, which typically have a leading market share position, high barriers to entry, consistent growth and profitability, a strong balance sheet, and business model sustainability; and
2) “Secular Growth” companies that commonly demonstrate faster top-line growth, are experiencing positive industry tailwinds, have disruptive business models that are redefining a value proposition for customers, and are often innovative businesses with visionary leaders.
At the buy point, the investment approach is contrarian in nature. We seek to identify companies experiencing a temporary event that has prompted the stock price to drop fairly meaningfully, creating an attractive valuation. Ideally, the stock price has stabilized leaving additional downside risk more muted as some short-term bad news is reflected in the stock price. At this point, the research conclusion is that there’s a potential multiple expansion opportunity with a company where forecasted earnings growth remains solid. To qualify for purchase, the Portfolio Managers seek at least 15% appreciation potential over the next 12 months.
With a list of candidates sourced from our screening methodology and idea generation, we then further filter the candidates through both a quantitative and qualitative analysis. In terms of the quantitative analysis, we compare and contrast a new idea’s financial performance against that of its industry peer group. This analysis incorporates a combination of growth, profit, valuation, and leverage metrics. Further, the analysis covers several years of historical performance as well as a couple years of forecasted assumptions. This analysis enables us to quickly compare and contrast the performance of one company against that of its peers. This assessment is important because we believe that a company’s ultimate valuation is a function of its growth and profit margin outlook. Armed with a better understanding of a company’s historical financial performance and outlook, we conduct a qualitative analysis. The qualitative analysis conducted is similar to Michael Porter’s Five Forces analysis. We analyze the level of competition within a given industry and business strategy development. We then dig into the annual and quarterly reports from the company and its competitors, listen to earnings conference calls, review sell-side research, and often conduct meetings directly with company managements. This analysis provides us with a more complete mosaic of the company and the industry in which it operates. The financial analysis paints the picture while the qualitative analysis provides the added context, which is also important.
Once an investment candidate passes the deeper quantitative and qualitative analyses, we then work to estimate, by establishing a price target, what potential return we might earn if we buy the stock.
Once an understanding of the industry landscape is achieved for a company, the focus shifts to valuation. A company’s Price / Earnings (next 12 months), Price / Sales (next 12 months), and Enterprise Value / EBITDA (next 12 months) are analyzed both on an absolute basis and relative to a company’s sector and the broader market. A 12-month price target is established for each existing and prospective holding. Price targets are established by forecasting earnings expectations then applying an appropriate multiple.
Typically, Wall Street consensus estimates are used. Appropriate multiples are determined utilizing the following: 1) the historical multiple of the company going back 10 years, and 2) the current multiple being granted to the company’s industry peer group. A target multiple may be adjusted based on a company’s competitive positioning within its industry as well as company specific issues.
Typically, the Portfolio Managers construct a high conviction portfolio of 25-45 companies with favorable growth, profitability, and valuation attributes. Position sizes mostly range from 2-6% of portfolio assets at purchase with a maximum position size of 8%. Cash reserves are generally less than 6%. The Portfolio Managers make the final decisions for the Century Large Cap Growth strategy, including portfolio construction.
A stock may be sold or trimmed for the following reasons:
- Deterioration of fundamentals
- Price target discipline
- Better opportunities are available
- Catalyst event – e.g. accounting irregularities, management changes, M&A activity
- Position size exceeds 8%
- Stock weakness: Underperformance >10% relative to the R1000G Index
triggers a re-examination of the position