Investment Process

 

JWS Capital Management employs a combined top-down and bottom-up research process, based on growth metrics and qualitative factors, and supported by rigorous, fundamental, and technical analysis, to drive security selection. Investment themes are created by examining global and domestic macro indicators, supported by fundamental and technical analysis that underpins the portfolio’s composition.

The security selection process begins with screening for companies that are growing faster than the market, coupled with having a probability weighted expected return of greater than 25% within a year.  Other characteristics include:

  • Companies with dominant market share, high return on assets, strong discretionary cash flow, and good franchise characteristics.

  • Stable companies that are minimally affected by outside forces beyond their control, including competition, commodity pricing, technological obsolescence, overcapacity, and politics.

  • Companies that stay in the same business year after year and do not depend on constant change for continued success (i.e., companies that do not have to constantly “reinvent the wheel”).

  • Companies that reinvest cash flow at high reinvestment rates to strengthen their position in the marketplace and increase value for stockholders.

  • Undervalued companies that have strong long-term businesses, but are being offered at low price/earnings ratios relative to market averages because they are out of favor due to a particular short-term consideration.

Companies that meet these criteria must then have superior management, a dominant and growing market position, sound and transparent financials, and a sustainable and attractive risk/reward profile.

These initial screens are further enhanced by relative value metrics, fundamental research to uncover estimates for a company’s cash flow and earnings growth, and its competitive positioning. These are combined to set an expected price target. Technical analysis is then applied to determine the company’s relative strength, evaluate whether it represents either a potential overbought or oversold situation, and establish its pricing support and resistance levels. As Warren Buffet’s 2016 annual letter to shareholders stated, “What is smart at one price is stupid at another.”

JWS Capital Management applies a similar analysis to fixed income securities.

Portfolios typically comprise concentrated positions, with an average of 6-12 highly liquid mid-to-large-cap names. Securities are held until price targets are realized, liquidity conditions reverse, the initial investment thesis no longer applies, or it is determined that the company is vulnerable to adverse interest rate or currency movements. Although JWS Capital Management will tolerate small losses (usually in the range of 4%-6%), positions will be sold rather than sacrifice principal.

Enhanced risk management is central to JWS Capital Management’s investment process, and is driven by tactically adjusting gross and net market exposure through the use of inverse ETFs, which position the portfolio to profit from the decline in an underlying benchmark index. Portfolio risk is also monitored at the security, sector, industry, and asset class levels, imposing an overlay of technical factors, such as moving average crossovers, and how a company’s returns compare to its industry.

Finally, Value at Risk models are employed to measure each security’s sensitivity to changes in JWS Capital Market’s underlying economic and/or capital markets assumptions.