Our Small Cap Value investment process seeks to build a stable, low turnover portfolio for the Fund, with the goal of providing attractive risk-adjusted total returns over the long term. Typically, the Fund holds 80 - 125 stocks, diversified across the majority of industrial sectors.
  1. Phocas begins with the entire universe of U.S. public equities.
  2. We use decile rankings to eliminate the micro cap and large cap stocks as well as illiquid securities.
  3. For operating companies, we screen further to examine the companies in the two lowest deciles based on price-to-book, price-to-earnings, enterprise value-to-EBITDA, and price-to-sales based on historical sector price correlation. We also look for positive EBITDA or cash flow, and adjust for balance sheet risk for GIC (global industrial classification) sectors that show high historical price performance correlation. For financials and REITs, we apply our proprietary industry models to eliminate unattractive equities.
  4. We conduct a quantitative analysis of each company, focusing on:
    Balance sheets;
    Cash flows;
    Income statements ; and
    Ratio analyses.
  5. We conduct a qualitative analysis of each company, focusing on:
    Governance;
    Industry analyses;
    Quality of company management teams;
    Contact with company management teams;
    The companies' mergers and acquisitions histories and prospects; and
    Catalysts for stock price appreciation.
  6. Next, we conduct proprietary modeling to identify the stocks that will be in the portfolio. This consists of the following analyses:
    Discounted cash flow;
    Asset valuation;
    Sum-of-the-parts;
    Price-to-book, price-to-earnings, enterprise value-to-EBITDA, and price-to-sales ratio analyses;
    Relative multiples;
    Proprietary Phocas Financial Corporation financials model; and
    Proprietary Phocas Financial Corporation REIT model.
  7. Finally, we construct a diversified portfolio:
    Weighting of sectors is based on individual security valuation levels and appreciation prospects; and
    Representation generally in the majority of industrial sectors.
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Client Services
Discounted Cash Flow Analysis
A calculation of the attractiveness of an investment opportunity using future free cash flow projections and discounting them to calculate a present value. "DCF" analysis is used to assess investment potential. If the value calculated by DCF analysis exceeds the current cost of the investment, the security in question may be attractively valued.
Enterprise Value-to-EBITDA Ratio
Enterprise Value ("EV") is essentially, the theoretical takeover value of a company, and is calculated using the following formula:
Total Market Capitalization + Debt + Minority Interests + Preferred Shares – Total Cash – Total Cash Equivalents.
The EV / EBITDA ratio, also called the "Enterprise Multiple" is calculated by dividing Enterprise Value by EBITDA, and is a way to understand how much a company is worth in relation to its EBITDA. Again, this is a way to look at a company in the way that a purchaser of the company might view it.
Free Cash Flow
Free Cash Flow ("FCF") is calculated using the following formula:
Net Income + Depreciation and Amortization – Capital Expenditures – Changes in Working Capital.
FCF is the amount of cash that remains after a company has paid its operating expenses. In other words, FCF is cash that can be used to acquire other companies, pay for research and development, reduce debt, or pay dividends.
Price-to-Book Ratio
A ratio used to compare a company’s total market capitalization, or total market value, to its book value. This is calculated using the following formula:
Total Market Capitalization / (Total Assets – Intangible Assets and Liabilities).
Price-to-Earnings Ratio
A ratio — also called a "P/E Ratio," "Price Multiple," or an "Earnings Multiple" &mdash used to value a company’s stock that is calculated using the following formula:
Price per Share / Earnings per Share.
For example, a stock trading at $14 per share, and earnings for the trailing 12 months of $2.00 per share would have a P/E ratio of
$14 / $2 = 7.0.
Price-to-Sales Ratio
The Price-to-Sales ratio is calculated by dividing the Price per Share by Revenue per Share.
Relative Multiples Analysis
Relative Multiples Analysis is the process of comparing the values of various multiples against those values for other stocks or companies, and also against historical values for the same company or companies.
Sum-of-the-Parts Valuation
Sum-of-the-Parts valuation involves determining the total value of a company by adding up the valuations of the company’s divisions if they were sold off.