DOMO Capital Management | Concentrated Value Specialists

OUR INVESTMENT PHILOSOPHY

Fundamentally, we're value asset managers that believe in purchasing quality companies at valuations meaningfully below historical averages through a concentrated portfolio of only our best ideas while also utilizing cash as a strategic asset.

Our definition of value is relative - relative to the historical average of the security itself as well as to its peers. We find that these opportunities typically develop over the course of several quarters when the market starts to put too much emphasis on recent news or conditions that are not favorable for the company. We capitalize on this recency bias and are not bound by market capitalization or absolute valuation.

We like quality companies. We think quality companies are more likely to return to their historical valuations. By quality we certainly mean financial strength, but we also define quality as companies that have a commanding brand - as demonstrated through consistent and predictable earnings or consistent earnings growth. We also define quality as companies that simply have undervalued assets.

We believe in having a concentrated portfolio. We're interested in only really good ideas, and if they're not really good ideas we don't want to force an OK or average idea. If we can't find a really good idea - we'd rather go to cash. When you buy from us, you're buying what we believe are really good ideas and if we don't have them, we won't hold them. We believe, our ten-year record shows this is not just a good way to generate alpha by picking the right stocks, but it's also a good way to mitigate risk.

We believe that utilizing cash as a strategic asset is vital to our strategy. There are times when equities are not a great place to be. If we don't see compelling ideas in the market, we will have elevated cash positions. In fact, for very short periods of time, we may go 100% to cash. Infrequently, for a short period of time, but we do view cash as an overall important part of the portfolio and we use it as a strategic asset to both enhance returns and to mitigate risk.

P&I Morningtar Ranking

OUR DISCIPLINE & PROCESS

Once we source an idea through our screening process we must determine its investability which starts with determining the reason for the discount.

REASON FOR DISCOUNT

Investigate and determine the reason for the discount in valuation.
Learn about the business, industry, competitor, customers, and suppliers.
Determine if reason for discount is company specific or industry-wide.
Thoroughly read quarterly and annual reports.
Make a determination as to whether or not the reason for the discount is reversible

CATALYSTS

What are the catalysts?
How likely are the catalysts to occur?
How timely will the catalysts be?

QUALITY

The underlying business model must be sustainable and viable with serviceable debt loads.
Companies with stable and easily predicable earnings
Companies with consistent growth
Companies undervalued assets

FINANCIAL REVIEW

Review at least ten years of financials
Evaluate historical pattern of earnings growth margins, and return on assets.
Analyze level of cash and debt as it pertains to market cap
Determine required cash flows to service debt and capital expenditures
Prefer stocks with strong dividend yields and reasonable payout ratios

We use the market's tendency for recency bias - overreacting to the most recent news - to enhance our trading process.

NEW POSITIONS

Evaluate the total potential upside.
Determine potential catalyst timeline.
Execute decision based on strength and timeliness of catalysts combined with potential upside.

REBALANCING

Constantly analyze upside potential and catalyst timeline
Shift from heavily weighted positions to less weighted positions as potential upsides shift
Buy low and sell high.

EXITING POSITIONS

We will never exit a position based on price movement or unrealized gains/losses. The reasons we may decide to exit a position are as follows:

Achieved valuation
Catalysts exhausted
Change in business context or assumptions
Better opportunity
Portfolio protection

Cash is generally minimal; however, we do use cash as a strategic asset and will elevate cash for either of two reasons:

SHORTAGE OF IDEAS

If sells are not matched with buys due to a shortage of compelling new ideas, we will allow cash to rise.
We view this as an important barometer of broad market pricing

HEADLINE RISK

Infrequently, we will sell one or more names for short periods when we perceive a macro event with meaningful negative potential for a name or the market. One example of this was Brexit vote in 2016 where DOMO had over a 90% cash position.

Brexit Example

Less frequently still, we might utilize a market-shorting ETF to balance against anticipated short-term downside volatility. Cash is preferred and the ETF is only used if the appropriate amount of cash can not be raised due to anticipated company specific events for the current holdings.

A return pattern different from the market requires a portfolio different from the market:

FEES AND CONVICTION

In an era of increasing skepticism towards the contribution of active managers, we suggest allocating your budget for active management towards managers who invest with conviction in only their best ideas.
This is an unviable business model for inferior managers, and demanding for those who are effective, but rewards all parties who create value.

RETURN PATTERNS & VOLATILITY

We encourage investors to balance the common response to concentration, that it is volatile and "risky" with the recognition that when done well - concentration is the most efficient route to both alpha generation and risk mitigation.
We believe that excess diversification serves only to mask the fundamental effectiveness of the discipline