When asked about how we go about building a client’s portfolio, we like to make the analogy that constructing a successful portfolio is much like preparing a multicourse meal. It can be simple or more complex, but ultimately, rewarding! It starts by first hearing and discussing what the client’s main investment objective is (i.e., choosing the main course), then selecting core portfolio holdings needed to meet that objective. Next, more complementary selections are added (much like side dishes and seasonings) that may enhance the portfolio’s overall results. The initial step might be compared to choosing between a main course of pasta instead of seafood, or a meat-centric dish. Even then, there are many variations to choose from within any of those three selections. From an investment objective standpoint, does the client perhaps want an aggressive, growthier portfolio or one that is more stable and income oriented, or a blend of those two extremes? The meal analogy might be the difference between choosing a spicy Tex-Mex or Thai dish versus meatloaf and mashed potatoes. Either of the first 2 selections likely would have more “kick” to it while the second would surely be considered a more stable and dependable comfort food selection.
So how do we approach finding those potential portfolio enhancing ideas that might add value beyond its core holdings? First, a great deal of time is spent researching ideas of interest found through reading various trade publications or participating in industry webinars. Searching a company’s website, listening to past or current earnings call presentations, and reviewing their SEC filings follows. By far the most valuable insights are gained by attending investment conferences either virtually or in person. This allows us to have 1v1 meetings with company managements, both get to know them better and to gain a better understanding of their business. When possible, we will make on-site visits to see their operations first hand. Many companies may not be widely followed or well understood by the investment community or may be out of favor for various reasons. Our objective is to find situations where a potential catalyst-new management, rising order backlogs, new products, or perhaps an acquisition- hasn’t yet been recognized or fully appreciated by investors, but may have a positive impact on the future prospects for the company.
This approach requires diversification and patience for each situation to unfold, which in turn, results in lower turnover to the benefit of our clients. Often, these situations tend to be found among smaller companies where we have a better opportunity to get to know managements. We love dividend payers, especially ones with a history of increases, but not exclusively. Historically, we have focused on resource related ideas and the interconnectivity between the energy, metals/mining, infrastructure, materials, water, and agriculture sectors. A secondary area of interest finds us investigating companies in medical related industries such as pharmaceuticals, biotech and medical device manufacturers.
How has this approach played out? Not all clients own all ideas and, of course, not all ideas work out, but in the last few years, the companies below joined our past list of companies acquired either in a stock swap or a full cash merger, often at a nice premium to the client’s original purchase price:
- PC-Tel acquired for cash by Amphenol Corp. in December 2023
- Livent merged with Allkem (tax-free stock swap) in January 2024
- Pioneer Natural Resources acquired by ExxonMobil Corp. (tax-free stock swap) in May 2024
- Superior Drilling Products, Inc. acquired by DTI for a combo of cash and/or stock in August 2024
- Iteris Corp. acquired in November 2024 for cash by private Italian firm Almaviva.
- Profire Energy acquired by CECO Environmental for cash in January 2025
We’re always on the prowl for new ideas and love the hunt! It’s fascinating and often very rewarding!