my investment approach
Bates Creek Research provides detailed financial, quantitative and qualitative research on consumer companies. I read and analyze the 10K, 10Qs, footnotes, bank agreements and proxies in addition reading conference call transcripts and reviewing company presentations. Comparisons are made against earlier statements, identifying trends and changes before the stock begins to react. I understand the language of footnotes and how disclosures are made, which offers a window to what is going on inside the company. The research is all personally conducted by a former CFO with over 20 years of experience. Changes in disclosures often signal "surprises".
Stocks are valued based on the market opportunity and the return on capital generated as the company grows. To identify if a company is performing, I calculate a return on invested capital (ROIC) using accounting adjustments for unique industry characteristics. Firms with outstanding returns and good opportunities generate above average valuations. By comparing the relationship between ROIC and valuation, a "market valuation line" is created. Stocks trade around the market valuation, and over time equity valuations equalize. Poor performing companies have lower share prices, decreasing enterprise value which boosts return. Better performing companies earn higher share prices, lowering their return on enterprise value. My model and valuation approach identifies opportunities in both overvalued and undervalued companies.
I prepare a detailed financial model based on SEC filings, management statements, field research and industry publications. I develop a detailed strategic understanding of the business and its strengths and weaknesses. Great firms and great management teams can't make up for a mature or declining market. Matching these two approaches allows me to generate useful, actionable market ideas.
Stocks sometimes get valued based on emotional factors and so firms can be oversold and overbought. By approaching valuation from a quantitative perspective, emotion is de-emphasized and intuition is enhanced. Investor intuition is then based on a solid understanding of the business opportunity and what factors will be important for success, in addition to having a good understanding how the market will respond. I provide a viewpoint on the fundamentals, while the investor focuses on timing, trading and market reaction.
To get a copy of the presentation from the 2010 NGA Conference email John Zott