We use a bottom-up process of fundamental analysis to look for individual companies that we believe are high-quality, stable, and have the potential to grow earnings for long periods of time. To determine that a company has these characteristics, Roger and Laura take the following approach:
Using financial databases, we screen for companies demonstrating high-quality growth. We are typically looking for:
- Steady earnings growth
- Rising return on assets (ROA) trends
- High absolute levels of ROA vs. historical and peers
- Accelerating revenues
- Improving cash flows
- Positive inflections in income statement or balance sheet metrics
Deep Due Diligence
We use a thorough and collaborative process to understand the companies in which we invest. We study the company, its competitors, and its industry. We talk with management to verify the quality of the leadership and gain deeper insight for the company’s prospects and risks. We call competitors, suppliers, and customers to make sure we have a complete picture of the landscape. Meanwhile, we are constantly talking with other Wasatch portfolio managers and analysts in order to leverage the knowledge, perspective, and insight of the broader Wasatch team in every investment decision.
We build proprietary earnings models in order to analyze a company’s key growth drivers. Our models help shape our projections of a company’s potential for earnings growth and what we believe to be a fair price for the stock.
We consider a variety of appropriate valuation metrics (e.g. Price to Earnings, Enterprise Value to EBITDA, Price to Book, etc.) to assess the potential return and the risk/reward trade-off of each stock. Valuation is an important component of every investment decision.
Roger and Laura limit the purchase of stocks to those companies the team believes are reasonably priced relative to their expected .