Investment Philosophy

We utilize diversification to help limit the risk of owning stocks. Individual equity positions are generally limited to 10% or less of the portfolio value. Mutual funds are also used to fulfill diversification requirements. Most stocks purchased for accounts are value oriented, but some companies are purchased because of their high return-on-equity results. Options may be used periodically to generate income and as a hedge for portfolios. Short sales may be used as a hedging strategy to reduce volatility in accounts.

As a value oriented manager, our investment focus is on companies whose stock price can be economically justified for long-term purchases. Economic justification is best described by the price you pay verses the free cash flow a company generates. We seek to own companies producing free cash flow at returns that are higher than ten year Treasury bond yields. Most of the effort of analyzing a company's cash flow is directed towards the stability of the company's cash flow and its potential growth.

• Free Cash Flow- is defined as operating cash flow minus (plus) changes in working capital minus the amount of investment required to maintain the business. We evaluate the quality of cash flow and try to determine how dependable the company's cash flow will be. We prefer companies that do not require high levels of capital expenditures, or that are on the edge of finishing a capital expenditure program and will begin to receive the benefits of their investment. The second part to free cash is how the company reinvests its free cash flow. The profitability of a company is important, but the growth of shareholders equity is dependent on reinvestment of capital. Analyzing a company's investment program is as important as its current business.

• Evaluating Performance- determining what to pay for performance is a very subjective process. To help guide the investment process, we use a few valuation measures to determine relative value. First, we attempt to limit our investments to companies that have PEG ratios of one or less. The PEG ratio is found by dividing a stock's P/E by its expected growth rate. Next, we try to find companies that have steady or rising return on equity. For a company to maintain consistent return on equity, attention must be focused on how their capital is invested.

The basic premise for selecting undervalued stocks is to find companies with sound products or services and wait for the market to once again value the company within historical averages. Ideas are generated from financial publications, annual reports, internet resources, and conversations with various contacts.