People

Since we are long-term investors, we realize the people running the business will make a critical difference. While we do believe employee integrity, company environment, compensation amounts and methods, and management experience are important, we believe the largest impact we can have as analysts is to evaluate a management team's cash allocation skills.

Stockholders may receive a portion of the businesses free cash flow in the form of dividends, but in many cases this free cash flow may be reinvested by management. Thus, we look for management that allocates cash objectively, much as we would choose to allocate our clients' capital. As we see it, management has essentially five options, which we call GARDD (or guard):

  1. Grow the existing business profitably
  2. Acquire synergistic businesses without overpaying
  3. Repurchase own stock at value prices
  4. Dividend issuance when no other favorable investments exist or when in low tax environments
  5. Debt pay down or build up cash

Therefore, we analyze managements' ability to “GARDD” our businesses cash flows. Too often, we see management teams that make annual reports and conference calls solely an exercise in optimism, and therefore these mediums of communication only reflect the skill of the company's public relations department in creating false impressions. Instead, we focus on the cash flow statement.

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We’re more concerned with what management has done in the past than with what they claim they will do in the future." – Brian Yacktman