When it comes to investing in today’s market, a strong underlying foundation is vital to forming the core of success. Steven Glass, from the Pengana International Equities Fund provides his 6-point checklist that separates the good from the bad, allowing him to invest with confidence in an overly noisy environment.
Invest with businesses that generate cash
We think about it as opportunity cost. We could get 2 - 2.5% from bonds at the moment but we want to do better than that. We have about a 3% premium, so we want our free cash flow yield to be minimum 5% in our stocks, not necessarily in dividends but in free cash flow generation in the company.
Look for reasonable valuations
Not accounting earnings, not underlying earnings. Cash. You can't spend accounting earnings but you can spend cash. So, that's a starting point, all our companies generate cash
Growth is pivotal. The company must be developing
Time is a friend of the growing company, so we can hold our stocks for longer. Also, growing companies are places people want to work. You've got a better corporate culture. It's also the type of place when management can focus on strategy rather than operation, so good things happen to growing companies.
Ask yourself, will the business be better tomorrow than it is today?
We look for a positive change and inflexion point. That could be a change in management, maybe they just built a new factory, maybe the cycle's changing, maybe there's a huge structural tailwind, but just some positive reason to own the company
Management must be spending money in order to move the company forward
Now, everyone will say they look at management, but we've got very distinct, important markers of what a good management team is. It's not always a good management team because the share price has gone up. We want management that are spending to grow the company. We take very wide margins as a potential bad sign. It's very easy to just sack people and have wide margins for a while, but inevitably it comes back to bite you
Avoid any companies that are highly leveraged and have structural headwinds
At all cost avoid companies that could blow up. So, highly leverage companies with gearing of a four times EBITDA. Companies with huge structural headwinds such as newspapers. Companies that are opaque, that don't speak to investors. Companies where we can't really understand the ‘need’ for them to exist. We like nuts and bolts good businesses.
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Pengana Capital Group (ASX: PCG) is an ASX listed diversified funds management group specialising in global and Australian listed equities, with distinct investment strategies that aim to deliver superior risk-adjusted returns to investors.