Our Investment Approach
Stellar Capital follows the same basic investment approach across all our investment options, that is, we invest in deeply mispriced situations, with a large margin of safety.
We invest based on our due diligence process developed over many years and which has been shown to withstand the test of time. We ignore the crowd, pundits, short term market fluctuations and other irrelevant market noise.
Our due diligence process is structured around 5 key questions, with a proprietary detailed checklist of sub-areas within each question. The 5 questions are:
- Business quality: How good are the company and the industry in which it operates in?
- Valuation: What is the extent of the margin of safety?
- Management quality: How competent, honest and aligned is the company’s management?
- Catalysts: What are the events that would cause the company's valuation to reflect our estimate of intrinsic value, and when could such events occur?
- Position sizing: How much capital should we commit to this position?
Typical Investment Situations
Our experience has been that mispriced securities tend to be found in the following situations and hence, these are where we focus our efforts:
When the company’s future is different from the past (for example, management changes, M&A transactions, shareholder activism, new strategic plan, spin-off).
Time arbitrage: Market participants focus too much on near-term returns and underweight long term performance, providing opportunities for patient opportunists like us.
Temporary (not structural) earnings disappointment.
Industry changes (e.g. consolidation, changes in supply/demand dynamics, technology inflections).
Market dislocations resulting in forced selling and cyclical downturns.
