Earnings, FCF, Assets and Dividends

[Tommy Kristiansen]

I’ve been thinking a lot about my preferences in the investment process lately, and found a great thread written by Geoff from Focused Compounding:

https://www.gurufocus.com/news/176259/earnings-yield-or-free-cash-flow-yield-which-should-you-use

Admittedly, the topic might be somewhat basic but I think it’s necessary to take a step back and look at ones approach. If not just for reflecting on your own biases.

Personally, I tend to prefer quite basic valuations on asset values. I need to figure out where the downside lies and how I’m getting my money back. It might not be the most optimal way to invest, but it comes naturally for me. Generally don’t do DCFs or other forms relying on guesstimates, either.

I’d like to know how you guys approach valuations. What do you look for? Do you differentiate your approach on a case-by-case basis? How does the method of valuation fit your strategy?

[Markus Enge]

I differentiate my approach quite a lot from company to company. For banks and asset plays, I focus mainly on the balance sheets. For most other companies I use Gordons growth model (CF /(k -g )) if I need to make a full DCF it’s probably not a good enough case, or I am too optimistic of +5/10 years estimates. But I still check if the balance sheet for debt, increasing receivable/inventory, and other red flags..

[Kristian Aadnøy]

Hi! Generally, I look for fast-growing, scalable businesses early in the S-curve. I invest in both pre-rev., non-profitable, and profitable businesses, with large TAMs and the ability to grow top-line at a fast clip (>15-20% YoY). Typically I look at sales, gross margin, ebitda, and fcf multiples. However, I do believe that it is more important to understand the underlying business/sector and whether the addressable market is rather fixed or dynamic.

[Markus Enge]

Interesting approach Kristan, quite different from what I typically do.  How long do you typically hold companies? high/low turnover of the portfolio?

[Kristian Aadnøy]

Thank you! I typically hold for 1-3 years. I’m looking for inflection points in the underlying business, such as hyper growth, new product lines, and turnarounds. I would say my turnover is quite low, however, I generally add to my positions as I gain conviction. Moreover, I let my positions fight for capital, so I may add/reduce weight of current positions rather than introducing/exiting positions.

[Tommy Kristiansen]

Interesting, Kristian! What’s your take on diversification?

[Kristian Aadnøy]

I run a semi-concentrated portfolio (8-10 holdings), with a pure bottom-up focus. My view on diversification is that a semi-concentrated portfolio generally allows me to control output risk while optimizing alpha. I’m a young investor, with a long-term focus. Thus, in my opinion, risk is not valuation, macro, etc. in isolation. IMO, conviction/solid DD typically mitigates risk, and vice versa.

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