The Inflection Strategy
Achieving a different result requires taking a different approach,
tight alignment of interests, focus, and simplicity
What's Unique About It
Concentrated strategy of 20-25 mid- to large-cap equities. (Long only, no leverage, and no derivatives.) We are plain vanilla and simple. We know what we own and have strongly researched, differentiated investment views. Our objective is to avoid blow-ups and to own stocks that significantly appreciate. Inflection is an alpha-generation product. It does not seek to be a product that offers broad market exposure. There are thousands of mutual funds and ETFs that offer “broad market exposure.” Inflection is a differentiated offering.
2) Mid- to Long-Term Focused
We will only invest in companies that our analysis indicates will be thriving and growing companies three years hence. We are not interested in “short term” trades in bad companies. This is a game of the “greater fool”. We believe that an investment strategy dependent of the foolishness of others is not a strategy for sustainable outperformance.
Based on medium- to longer-term views and favorable business/industry inflection points, our investments are in companies with more earnings potential than the stock market expects and with the opportunity for multiple expansion.
We believe that a shorter time frame (less than one year) has less arbitrage potential given that is where a significant portion of active management is focused. Moreover, sourcing investment insights that are value-added within this short time frame is incredibly expensive and fraught with ethical risks.
3) The Consumer Factor™
An investment strategy focused on companies that serve the US consumer. These are companies such as First Republic Corp, Progressive Insurance, Delta, Toro, Apple, Microsoft, Pepsi, Diageo, Home Depot, and Amazon. We believe that the consumer will continue to drive the U.S. economy with superior growth and stability. This positions the strategy for superior long-term investment returns versus the S&P 500.
Over the past 20 years, the annualized outperformance of the Consumer Factor™ is 150 bps/year. This is a significant market anomaly that, to our knowledge, is unknown to Wall Street.
We believe that the outperformance stems from the fact that the US consumer has been the most material and stable driver of US economic growth. The Consumer Factor™ effect is a derivative of these companies serving the strongest momentum in the economy, which then leads to stronger and more stable earnings growth than the remainder of the market.
Inflection is not a sector fund. It is a concentrated “alpha generation product”. We only employ the Consumer Factor™ because it helps us accomplish this objective.
We formulate a medium-term view:
- We generally plan a three-year holding period for our investments.
- We try to understand the merits of our investments three years hence. This gives us the basis for an opinion of what “exit point” valuation we should consider from the buyer’s perspective.
- Should the current stock price offer over a 10% annualized return to that "exit point", we then conduct a more thorough analysis of the longer-term opportunities and nearer-term issues.
Stock selection is based upon one of two criteria:
1. Big Idea Investments:
3+ year investment horizon, creating a portfolio that best represents the thriving companies for that time horizon, and where profit pools for a company/industry are not as well appreciated by the stock market as our analysis suggests.
2. Inflection Point Investments:
Identifying an upcoming inflection in a company’s key performance indicator (KPI) such as organic revenue growth, margins, capital allocation, etc. Specifically, we are looking for a sustainable favorable non-linear trend. The Street typically models and sets expectations based upon a linear basis.