Philosophy and Process
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