Investing in Growing Businesses with Undervalued Stock Prices
At Naylor & Company, we believe that owning competitive companies that serve predictable and fundamental consumer needs is essential to prospering with investments. We prefer companies that earn high returns on equity, provide goods and services superior to their competitors and operate in industries that have long-term growth trajectories.
Of course, strong companies often have high stock prices relative to their earnings. In order to invest in strong companies at attractive prices, it is necessary to buy them when their industries are out of favor or the company itself has suffered a short-term, manageable setback before resuming its long-term path to growth.
When we make an investment, we plan to hold it for several years because we view ourselves as business owners rather than stock traders. We believe that an investor can obtain better results in the stock market by focusing on the long-term fundamentals of the business itself, rather than short-term fluctuations of the overall stock market. Therefore, we do not try to time the stock market, but instead use the stock market’s volatility as an opportunity to buy good companies at attractive prices.
Naylor & Company uses a detailed and refined process for selecting the stocks for client portfolios. We begin by researching industries that are in the beginning stages of recovery from a temporary economic downturn. There are often many good attributes to the companies in these industries.
First, the stock prices can be relatively low because many investors do not have the patience to await the recovery. Second, the strong companies have usually streamlined their operations to manage the downturn. Third, the strong companies face reduced competition in the recovery because the weaker companies failed, resulting in less competition. Consequently, the recovering companies can achieve both higher revenues and higher profit margins in the recovery.
We invest in these companies when the industries begin to show signs of recovery and hold them, preferably for several years, until their valuations, business conditions and performance justify selling them in favor of other investment opportunities.
In the past, we have used this process to find good investments in a variety of industries, including airlines, healthcare, online travel agencies, banking, the rental car industry, automobile manufacturing, gaming, website hosting, tow truck manufacturing, retail, cable television, transportation logistics and semiconductor manufacturing. Having the flexibility to invest in many different industries allows us to take advantage of multiple cycles of downturn and recovery across the U.S. economy.
Naylor & Company’s Core Composite uses a deep-value strategy to create concentrated portfolios that emphasize companies with strong competitive positions, good long-term growth potential and attractive stock prices.