Research Process
Our research is extensive and thorough. We continually search for good prospects, focusing on the small cap universe. Once we identify a candidate, we begin due diligence beyond just the numbers. We consider it important to investigate company management, take a tour of the company’s facility, and interview people knowledgeable about the industry outside of the company, such as consultants and competitors.
During company visits, we sometimes discover areas of promise that overshadow the weakness in the numbers. Conversely, we may find problems that the numbers have failed to show. Building a financial model is important, but no impression becomes complete without a friendly but impartial visit.
Only a small number passes muster. If we add a stock, we stay in close contact with management, allowing us to ensure that our original investment thesis remains intact.
How do we generate new ideas?
1) Research staff’s experience
Our top four research professionals have been in the investment profession for over 100 years combined. In some cases, we have been watching a company for decades and can quickly interpret a new development or a change in stock price. In other instances, we have previously owned the companies and understand them very well. For such a company, we may have sold the stock when the valuation got too high or when fundamentals deteriorated, but kept it on our watch list. A drop in the stock price to within our valuation range, a news article, or an industry development can revive our interest. Due to our familiarity from previously owning the stock and sometimes a past relationship with management, we are able to move quickly with our research and reach an investment decision.
2) Active screens
We are actively searching for new investment ideas that meet our criteria. This includes sifting through the Valueline® investment survey, browsing financial publications, and running our own customized screens. When we run our screen, we are able to instantly narrow down the equities universe to those stocks that meet our criteria, such as low price-to-earnings ratio, attractive balance sheet characteristics, and favorable industry or region.
3) Macro, regional, and industry analysis
While we are bottom-up investors, focusing on analyzing individual companies instead of buying into what’s “hot”, many of our ideas come from catching onto industry and macro trends. While we rarely buy or sell a stock purely on economic forecasts, an impending recession will cause us to pay more attention to balance sheet strength and look for countercyclical characteristics. For example, a large-scale natural catastrophe can cause an inflection point in the insurance pricing cycle and thus motivate us to take a look at insurance stocks.
Sometimes stocks in an entire country or region may be priced very cheaply compared to historical averages. Perhaps the country is recovering from a recession or currency devaluation. Over the past decade, First Wilshire has made a number of investments in China. Driven by a strong work ethic, favorable world trade, and supportive government policies, Chinese entrepreneurs have created many rapidly growing small companies. Due to the inefficiency of China’s capital markets, some of these companies seek to raise capital in the United States and list on American stock exchanges.
4) Our research database
We have analyzed thousands of companies since our inception and organize all notes and reports from our analysis in our research database. Our database contains over 2,000 companies with data going back over 10 years. This knowledge enables us to quickly come to a decision on a company we have researched before. With solid data, we avoid starting from scratch when a company pops up again on our screen, even when a different analyst studies the data.
Our notes contain screens, interviews with management, customers or other investors, managements’ response to emailed questions, and analysis of news articles and conference calls. A company’s research folder may also have our reports, models, investor presentations, industry research and pictures. We visit companies whenever possible and record detailed data about their management, facilities, customers and products. This data, including a historical database of pictures, enables us to gain a deeper understanding of a company’s culture and management and help in presenting the company to our investment committee. We have visited some companies multiple times and can judge their progress from the pictures. For example, a previously busy factory line that is now idle or a build-up of inventory in a warehouse may be cause for concern.
Our Philosophy
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