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Philosophy
Scott Sterling Johnston is the
architect of an investment style that has consistently produced
industry-competitive investment returns for over 30 years. This style is grounded
philosophically on the belief that superior investment returns are
generated over the long-term by investing in under-followed companies
experiencing an acceleration in earnings and revenue growth.
Sterling’s investment style is best depicted as fundamental – driven by
bottom up stock specific research. Portfolios are built one stock
at a time. Sector weights, while limited by strict risk
controls, can deviate from the benchmark. Sterling Johnston’s
investment portfolios remain fully invested at all times.
Research
Sterling’s fundamental research
process is the cornerstone of our investment strategy and is focused on
creating a discovery advantage. The organizational structure and
investment approach of the firm are specifically designed to develop a
flow of quality, fresh information that can be effectively and
efficiently evaluated to enable prompt decision making within the
team. Sterling’s research process combines both internal and
external sources.
Sterling’s internal research process is an extensive due diligence
process, including analysis of company financials, careful evaluation
of broker-generated research and numerous meetings with company
management. The internal research process accounts for
approximately 60% of the information reviewed on a given company.
For additional perspective and sourcing of investment ideas, Sterling
also utilizes a network of regional brokers, analysts, consultants and
investment bankers that often provide the team with insight into
under-followed companies.
Externally, Sterling’s research process includes ongoing communication
with regional brokers, analysts, and investment bankers that provide
the team with insight into under-followed companies. The firm believes
that regional investment professionals in close contact with local
entrepreneurs are particularly adept at helping to identify new and
exciting growth opportunities. This network, which essentially acts as
an extension of the firm’s research staff, is well-acquainted with
Sterling Johnston’s investment criteria and is motivated to foster
research ideas.
As a result of both internal and external research sources, the
Sterling Johnston investment team performs over 250 meetings with
company management teams per year, whether in our offices, at industry
conferences, or on-site at the company’s location. The team also
conducts approximately 300 meetings per year with research analysts
from the regional broker dealer and independent research analyst
community.
Purchase
Discipline
The profiles of Sterling’s ideal stock candidates have the following
characteristics:
Accelerating Earnings
Strong Balance Sheet
Strong Company & Industry Relative Price
Strength
Low Institutional Ownership/Sponsorship
Catalyst – Company/Industry Driven Event
Sell
Discipline
Sterling Johnston employs a strict sell discipline through which the firm seeks to capture the upside of winners and avoid significant losses.
Stocks will be sold for any of the following reasons:
Fundamental thesis deteriorates
Extreme valuation concerns
Weakening technicals/decline in relative price
strength
Catalyst achieved or exceeds market cap limit
Portfolio
Construction/Risk Control
Sector weights can significantly deviate from the benchmark. The
following guidelines and constraints are utilized in portfolio
construction:
Economic Sector: No more than 50% in any one of the
9 economic sectors
Economic Sector: Major economic sector exposure
limited to 2x benchmark
(Technology, Healthcare, Consumer Goods &
Services, Financials)
Economic Sub Sector: Spread among 20 economic
sub-sectors
Industry Group: Spread among at least 30-40
industry groups
Position Sizes (Micro & Small): 80-110 Stocks;
0.75-1.50% at Purchase;
3.0% Maximum with Appreciation
Position Sizes (Smid): 50-75 Stocks; 2.0–3.0% at
Purchase; 4.5% Maximum
with Appreciation
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