How We Evaluate a Business
The six lenses we bring to every company we consider owning.
Six considerations — from the durability of its competitive advantages to the price we pay — shape whether a company earns a place in our portfolios.
Competitive Advantages
Competitive advantages are critical weapons that keep a company ahead of the competition. Examples of competitive advantages are cost leadership (more for less), differentiation (more for more), scale, network effects, ownership of brands or intellectual property, favorable regulation that creates toll-booth dynamics, operational effectiveness, technological expertise, and financial flexibility. Without these competitive advantages, achieving a high and sustainable return on invested capital is nearly impossible.
Management
We look for strong leadership teams that are aligned with the interests of long-term shareholders. Priorities should be extending competitive advantages, achieving best-in-class operational excellence, and establishing strong capital allocation policies.
We prefer companies run by owner-operators that have cultivated an entrepreneurial mindset across all levels of the organizational structure. Lean and flat structures enable companies to evolve with the operating environment and capture emerging sources of value with new products and services.
Valuation
We value businesses in consideration of their macro environment, leadership, competitive advantages, and risk factors. The future is hard to predict; we strive for conservativism in our assumptions.
Purchasing companies below our estimate of intrinsic or fair market value offers the potential for outperformance as the stock ascends to fair value.
Stocks trading below their fair value offer a “margin of safety” — downside risk is mitigated because these stocks are detached from their fair value.
Business Model Evolution
History is replete with examples of companies that stood still as the world changed around them. Competitive advantages that serve a company well today will erode over time if management fails to recognize changing consumer preferences or disruptive new technology that could upend the economics of their industry.
We look for management teams that look to the future. Such companies are not afraid to jettison business lines or make large investments to capitalize on opportunities — even at the expense of short term earnings.
Macro Evaluation
We evaluate headwinds and tailwinds to identify threats or opportunities that may impede or accelerate growth over the short and long-run. Transitory headwinds such as input costs, irrational competition, wage pressures, etc., may create an opportunity should investors be overly pessimistic about their duration or intensity.
We prefer companies poised to benefit from secular growth drivers such as demographics, technological trends, or geopolitical forces rather than companies in cyclical sectors.
Mispricing & Catalysts
We unravel the prevailing narrative surrounding the company to understand the reasons why the investment opportunity exists. What information or understanding do we have that gives us an edge?
We prefer businesses with clear catalysts that will close the gap between price and our fair value estimate.
DISCLAIMER
The information contained herein is for informational and reference purposes only and shall not be construed to constitute any form of investment advice. Nothing contained herein shall constitute an offer, solicitation, recommendation or endorsement to buy or sell any security or other financial instrument. Investment accounts and funds managed by Generation PMCA Corp. may or may not continue to hold any of the securities mentioned. Generation PMCA Corp., its affiliates and/or their respective officers, directors, employees or shareholders may from time to time acquire, hold or sell securities mentioned.
The information contained herein may change at any time and we have no obligation to update the information contained herein and may make investment decisions that are inconsistent with the views expressed in this presentation. It should not be assumed that any of the securities transactions or holdings mentioned were or will prove to be profitable, or that the investment decisions we make in the future will be profitable or will equal the investment performance of the securities mentioned. Past performance is no guarantee of future results and future returns are not guaranteed.
The information contained herein does not take into consideration the investment objectives, financial situation or specific needs of any particular person. Generation PMCA Corp. has not taken any steps to ensure that any securities or investment strategies mentioned are suitable for any particular investor. The information contained herein must not be used, or relied upon, for the purposes of any investment decisions, in substitution for the exercise of independent judgment. The information contained herein has been drawn from sources which we believe to be reliable; however, its accuracy or completeness is not guaranteed. We make no representation or warranties as to the accuracy, completeness or timeliness of the information, text, graphics or other items contained herein. We expressly disclaim all liability for errors or omissions in, or the misuse or misinterpretation of, any information contained herein.
All products and services provided by Generation PMCA Corp. are subject to the respective agreements and applicable terms governing their use. The investment products and services referred to herein are only available to investors in certain jurisdictions where they may be legally offered and to certain investors who are qualified according to the laws of the applicable jurisdiction. Nothing herein shall constitute an offer or solicitation to anyone in any jurisdiction where such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such a solicitation.