HAHN CAPITAL MANAGEMENT’s investment process begins with the identification of stocks or sectors that appear statistically undervalued. The sources of ideas include screens of underperforming sectors and/or stocks; industry publications; financial media; networking with other managers; and Wall Street Research. Typically, the stocks are trading at the low end of their historic valuation range.
Once an attractive candidate for purchase is identified, the firm employs an in-depth, bottom-up research process designed to identify the inflection point where a company’s profitability is poised to recover, but where the recovery has not yet materialized. HCM must be able to identify a ‘value creator’ that will precipitate the improvement in profitability and investor sentiment within a three to six month time-frame. ‘Value creators’ that typically achieve this objective include Industry Consolidation, New Legislation, Management Change, New Product Innovation, or Industry Deregulation.
HCM employs both quantitative and qualitative criteria to evaluate the prospects for stock price appreciation. In the early quantitative stage of the research process, the firm gathers information on the company from a variety of sources including the Baseline database, Wall Street research and directly from the company. Next, the financial data is integrated into an in-house financial model to determine if the valuation measures are compelling and to forecast future earnings and cash flows. This aspect of the research includes of a thorough analysis of the company’s financial statements, profit margins, and capital structure. Then, a projected internal rate of return calculation is developed to see if the investment will meet the firm’s hurdle rate of return. The final step in the quantitative component is a discussion with both Wall Street analysts and management to confirm the projections and opinions. Equally important to HCM’s investment process is the qualitative analysis, which includes an evaluation of the strength of the management team, the company’s business strategy, core competency and competitive position. These valuation parameters are often the crucial factors influencing the decision to purchase the stock. On an ongoing basis, the firm establishes a dialog with the management of the company, industry experts and Wall Street analysts to monitor the company’s progress.
1) the price target set for the stock has been realized;
2) the fundamentals that guided the valuation deteriorate;
3) the management team changes its focus or business strategy;
4) the expected ‘value creator’ fails to materialize.
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