Stock Selection

Duncker Streett & Co. builds portfolios of stock that are diversified across economic sectors, style (growth and value) and market capitalization. Aggressive growth (such as momentum, early stage, or high P/E stocks) and deep value (such as commodity or turn-arounds), however, are generally avoided.

The process begins with a qualitative assessment of a company that appears to have attractive growth prospects. Factors such as management, business plan, industry position and product lines are evaluated. Strategic dynamics between the company and its competitors, suppliers and customers are considered, as well as secular and cyclical trends within the industry. Once a buy candidate has been identified, quantitative tests are applied to determine if a security is attractively priced. Traditional fundamental measures of valuation, profitability and growth are examined. A sophisticated cash flow return on investment (CFROI) and asset growth analysis is undertaken to investigate true corporate performance and assess the fair value of the stock. Companies that are spearheading growing industries with strong revenue growth and a high and rising CFROI are favored.

Securities are often sold, fundamentals deteriorate, a holding becomes disproportionately large, valuation reaches historical highs, or when a more attractive alternative is identified. Although holding periods may vary widely, and stocks that perform well are often held for long periods of time, we believe it is sometimes necessary to wait three to four years to realize the full potential of our initial investment thesis. Technical sell indicators may also be used. Capital gain considerations play an important role in the selling process for taxable portfolios. Average annual portfolio turnover is roughly 25%.

Asset allocation and stock selection are determined by "top down/bottom up" analyses.

Top Down Assessment

Goal:

Assess the factors that influence market behavior using the following considerations:


  • Economic Outlook
  • Growth vs. Value
  • Large Cap vs. Mid Cap
  • Sector Attractiveness
  • Technical Indicators
  • Sentiment Indicators

Considerations

Is it a good long-term investment?

• Solid Cash Flow Return on Investment (CFROI)
• Growth of sales and assets
• Stable or rising gross and net margins
• High cash flow/return on investment
• Strong balance sheet
• Record of new product development
• Competitive advantages

Are shares priced attractively?


Is warranted value using a CFROI model materially more than the current value? Are the PES and Price/Sales ratios attractive relative to its history, peers and the market? Can upside be achieved in a reasonable timeframe?

Events that may trigger downside moves?


• New products
• New management
• Changing industry dynamics
• Likelihood of M&A activity
• Earnings estimates upward revisions

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