We believe, superior long-term performance can be generated by investing in high-quality, durable business models at discounts to their private market value.
Emphasis on Quality First: Finding sustainable competitive advantages one stock at a time.
Private Market Value: Reinhart Partners’ proprietary methodology for determining a company’s intrinsic value.
Positive Risk/Reward: Protecting capital in tough markets while capturing most of the upside return when stocks advance.
Quality First - Valuation Second
Estimating intrinsic value is at the heart of every equity management strategy. We believe, a disciplined, repeatable process sets a manager up for success, while a loose intellectually inferior model for value almost guarantees under-performance. The anchor in Reinhart Partner’s mid cap value strategy is intrinsic valuation methodology – Private Market Value.
Private Market Value – The Anchor
- PMV is what an acquirer would be willing to pay for the entire company (per share).
- PMV is derived by first observing actual takeover valuation multiples.
- We utilize different metrics by industry to capture appropriate value-drivers.
- Stock prices are more volatile than the underlying value of the franchise, which creates unique investment opportunities.
- PMV becomes the “anchor” by which all decisions are framed within an emotional market.
- New names are purchased at a 30% discount to PMV, and stocks are sold when they reach PMV.
- The gap between price and PMV serves as an objective basis to trim or add to existing holdings.
Benefits of utilizing a PMV approach
- Objective: Measures what buyers will pay for companies.
- Disciplined: An anchor in the midst of emotional markets.
- Opportunistic: Takes advantage of market volatility.
- Custom: Applies to unique value methodology to each sector.
- Dynamic: Captures changing industry fundamentals and outlook.
- Strategic: Helps to identify key value drivers for every stock.
Screening the Midcap Universe - 1200 Companies
Universe customized by sector
30 metrics in four categories: Quality, Valuation, Neglect, Fundamentals
Top third of each industry
Company research to determine franchise quality and durability
Industry mapping, competitive dynamics, fundamental/financial analysis
Must meet rigorous quality standards
Based on historical M&A transactions
Customized by industry
Buy only if 30% or greater discount
Fundamental Analysis - Research Focus
Sustainable Competitive Advantage
- Barriers to entry
- Customer captivity
- Favorable industry structure
Healthy Demand for Product/Service
- Underlying growth is stable/growing
- Long product life cycles
- Avoid risk of secular decline
Risk management is central to our investment process
- Durable business models limit fundamental downside
- Avoid businesses in secular decline
- Margin of safety built into valuation discipline
- FactSet Portfolio Analysis tool
- EVADimensions Portfolio Monitoring tool
- Proprietary PMV ranking tool
- Daily monitoring and communication
- Weekly Equity Team meetings
- Quarterly Investment Committee meetings
- Strategic review of significant underperformers
- 40-50 holdings
- Position size limit: 4%
- Sector weights: +/– 10% vs. benchmark
- Max cash weight: 10%