Screening is a central tenet of the Barrack Yard Advisors risk mitigation strategy.
It is a way to minimize avoidable mistakes and align investments with our 5 Enduring Principles.
Barrack Yard Advisors look for 10-years of uninterrupted profitability:
- Return on Invested Capital (ROIC) indicates how well a company uses money to generate returns. Ideally, ROIC is considerably higher than cost of capital.
- Return on Equity (ROE) measures profitability in relation to the money shareholders have invested. ROE will be >20% for many firms, but can be considerably lower for companies selling near or below book value.
We favor companies that:
- Employ little or no long-term debt
- Do not rely on the capital markets for short-term funding
- Exceptions are fixed asset infrastructure-type investments
Over time, companies we own become more valuable if they continue to manage cash flow effectively. We measure valuation on these parameters:
- Free-Cash-Flow (FCF)
Cash available for distribution to shareholders after all planned capital expenditures and cash taxes. Cash allows companies to pay dividends, buy-back shares, reduce debt levels, or make acquisitions.
Barrack Yard divides FCF by the enterprise value of the company to determine FCF yield. We then compare this yield with other available investments.
To measure growth, we compare current earnings-per-share (EPS) versus EPS on a date 10-years prior. In calculating EPS, we average 3-years of trailing earnings, then compare this number to the average trailing 3-year EPS from 10-years ago.
These measurements and comparisons describe the underlying growth of the business. Ideally, the p/e ratio will be <15x and the growth will be >7% compounded.
Additionally, Barrack Yard evaluates:
- Current dividend yield
- Current price-to-book value (for certain industries)
- Potential gains in reversion-to-the-mean analysis
Does the company offer beneficial goods or services that consumers will continue to need or want? Does it have an Edge
Corporate ‘Edge’ Examples
- High barriers to entry
- Ability to conduct one-sided price negotiations
- Leverage over customers or suppliers
- Competitive moats
- Rare assets
- Intellectual property
- Natural monopolies
State ‘Edge’ Examples
Examples of countries with world class competencies:
- Brazil (Oil/Agriculture)
- Canada (Oil and Gas/Hydroelectricity/Mining)
- England (Retail/Finance)
- France (Luxury, Vanity Products/Wine/Nuclear)
- Japan (Machine tools/ Electronics/Miniaturization/Optics
- Norway (Petro/Fish Farming/Shipping)
- UAE (Trading/Ports)
- Switzerland (Pharma/Chocolate/Watches/Biotech/Private Banking/Inspection)
Foreign companies must have corporate and country edges, or other beneficial core competencies.