The Large Cap Core Philosophy
Piedra Capital’s investment goal is the real appreciation of our clients’ wealth over a multi-year horizon. Our Large Cap Core discipline is a quantitative selection process designed to reward our clients in a variety of market and economic environments. It emphasizes companies that have positive total return prospects and valuations that reflect reasonable expectations.
Stock Selection Criteria
Our investment philosophy utilizes a bottom-up stock selection process with a focus on companies with market capitalizations over $10 billion or companies in the S&P 500. The Large Cap Core strategy follows the basic tenets of the Prudent GrowthTM philosophy with some modifications specific to larger companies. Our experience shows us that investing in companies with the following characteristics generally has resulted in strong absolute and relative returns while lowering overall portfolio risk:
1. Total Return (Earnings and/or Dividends) Growing Faster than the Market
The market generally rewards companies with earnings and dividends rising faster than the overall market. We believe that the market will continue to reward such companies.
2. Realistic Valuations
We minimize exposure to highly valued companies by selecting stocks that have reasonable Price/Earnings, Price/Sales and Price/Book ratios.
3. Improving Revenue Trends
Companies with improving revenues are typically expanding market share, product lines and/or making accretive acquisitions.
4. Conservative Financials
We prefer companies with strong balance sheets that typically have reasonable and/or rapidly declining total debt to total capital. These companies generally have the ability to repurchase their own shares and make accretive acquisitions because of the flexibility of their balance sheets. The total debt/total capital of the portfolio is typically less than 50%.
5. Contrarian Holdings
Operational missteps by quality companies often provide a buying opportunity. The Large Cap Core product will also take advantage of short-term market inefficiencies — stocks temporarily undervalued (oversold) due to short-term issues, e.g. inventory, foreign exchange, etc. Historically these events have provided buying opportunities, as these well-managed companies tend to revert back to their mean valuation.
Idea Generation
Using StockVal (an investment database) Piedra strarts with a initial universe of 500 stocks applying a quantitative process to screen for the desirable technical and fundamental characteristics.
- Total return potential improving
- Improving topline growth
- Conservative and/or improving financial management
Portfolio Construction
A Large Cap Core portfolio is comprised of 25 to 35 stocks with an individual security position size of 1% to 3%. Individual security positions are limited to 6% of a client’s portfolio. We believe these guidelines provide adequate portfolio diversification and do not severely dilute the impact of the significant winners. PCL does not attempt to time the market or mirror any index. Therefore, any cash allocation is a residual of our stock selection process, typically between 1-10%.
Sell Discipline
PCL recognizes that one of the keys to our clients' long-term success is knowing when to leave or reduce an individual security position. Any of the following events will trigger a reevaluation and may lead to a sale:
- Shares reach initial or revised appreciation targets.
- Technical support levels are violated.
- Unexplained poor relative performance.
- Adverse corporate developments.
- More attractive investment alternatives.
