Palo Capital’s equity investing generally targets superior long-term capital appreciation, subject to the risk tolerances and income needs of each client.  Investments are made opportunistically without limitations based on investment style, market capitalization or country, using a research-intensive, “top-down, bottom-up”  process.  Turnover is usually low, especially in taxable accounts.

“Top-down.”  Our investing process begins with consideration of macroeconomic factors such as changes in economic growth rates and liquidity conditions, both for the U.S and for the increasingly important non-U.S. economies.  Knowing whether economic growth rates are increasing or slowing, and whether liquidity is expanding or contracting, are extremely important to identifying those sectors and asset classes that will do especially well or poorly. 

Investment themes.  Our process uses “investment themes” that we develop based on significant structural changes arising from such factors as wealth effects, technology, demographics, cultural change, politics, etc.  Examples of some recent themes include the emergence of the middle class in China and India, the shortage of U.S. refinery capacity, and the convergence of wireless technologies driven by demand for smaller and more feature-rich mobile devices.

Idea generation.  Many of our investment ideas come from researching the sectors and companies expected to benefit most from our investment themes.  In addition, we also screen stock databases using algorithms that incorporate the various stock selection factors listed below.   

Stock selection (“bottom-up”).  For each stock we hold or consider for purchase, we look at a long list of factors, the most important of which are listed below.  How we weight the relative importance of the different factors varies by industry and market conditions.

• Reasonable valuation in relation to sales & earnings growth rates
• Improving business position or product cycle
• Sustainable competitive advantage
• Strong cash flow generation
• High return on invested capital
• Significant insider ownership
• Shareholder friendly management
• Strong balance sheet metrics
• Strong or low risk technical chart

Portfolio construction & managing risk.   Client portfolios are constructed to provide exposure to what we believe to be our best ideas, and to provide reasonable diversification as to the number of securities held and the sector mix.  Besides diversification, risk is also managed through focus in the stock selection process on balance sheets and other factors that limit a stock’s downside in the event of adverse market action or company-specific developments.

Short-selling.   In suitable accounts where it is permitted, Palo Capital engages in short selling to profit from overvaluation of individual securities, and to improve returns during declining markets.  For further information on this investment strategy, see short-selling. 

Sell discipline.   We continually rank all positions and move money out of the lowest rated stocks into our highest rated ones.  In taxable accounts, this process is tempered by a bias against generating capital gains tax.   Other events that may trigger a sale include excessive valuation, deteriorating fundamentals, and adverse change in the factors forming our  investment thesis for the stock.