Pursuing high-quality, financially solid companies with strong levels of cash flow, limited leverage and strong debt coverage

Systematic’s Free Cash Flow Value methodology is based on our belief that:

  • The value of any asset is the present value of its future expected cash flows
  • The strongest small-to-medium companies are self-funding and have limited levels of debt
  • Investing in undervalued companies generating positive cash flows can provide an additional margin of safety
  • Portfolio management is best executed through a disciplined, repeatable process based on fundamental, bottom-up investing

For over two decades, we have built portfolios based upon the belief that investors can seek the higher returns generally associated with small-to-medium sized companies without sacrificing portfolio quality. We strive to identify high-quality, undervalued companies with strong balance sheets and solid business models that generate positive, recurring free cash flows, particularly relative to debt. Not all stock price declines are buying opportunities. By focusing on a company’s financial health and cash flows, we seek to identify undervalued opportunities while avoiding potential value traps.

We believe a company’s long-term value is equal to its discounted future cash flows. Earnings are important, but we focus on cash flows as the truest measure of a firm’s viability and operation. We seek to provide investors with an additional margin of safety through our requirement that companies have the ability to retire all outstanding debt within a reasonable amount of time based on expected free cash flow levels. These types of companies, in our opinion, significantly reduce financial risk and solvency concerns and exhibit the financial flexibility to navigate market changes more effectively.

Our Free Cash Flow Value investment methodology starts with a rigorous quantitative screening process to identify stocks exhibiting a combination of discounted valuation and financial strength. This screening process results in a research focus list, from which prospective investments are then further scrutinized by our research analysts. Our analysts perform intense fundamental analysis that includes a comprehensive review of historical operating results, including sales, earnings, operating and free cash flow, debt and debt coverage ratios. Our research also includes analysis and review of balance sheet and off balance sheet items, the current business model, company management and key industry trends. We seek to project future operating results and determine appropriate valuations based on price-to-earnings multiples, operating cash flow multiples, free cash flow multiples and discounted free cash flow. Our ultimate objective is to select well-managed, financially sound companies that are trading at discounts to their intrinsic value coupled with strong catalysts for price appreciation.

Buy/Sell Philosophy

Buy value based on financial strength Monitor holdings and execute sell discipline
  • Identify compelling valuation opportunities
  • Buy financially healthy companies with proven business models
  • Avoid speculative situations and financial risk
  • Take a long-term view
  • Reduce/sell on high valuation
  • Sell on signs of financial strength deterioration

Investment Process Overview

Identify Analyze Execute
Universe screening

  • Market capitalization within range of strategy’s core index
  • Screen using proprietary quantitative model (valuation and financial strength metrics)
  • Generate focus list
Fundamental research

  • Review company’s business model
  • Forecast financial results
  • Assess company valuation
Portfolio construction

  • Implement buy/sell decisions
  • Apply risk controls