Alexander Järf, Sifter Capital

Sifter’s screening process focuses on competitive advantages

Sifter’s portfolio management process is one of rejection. When only 30 companies from a pool of 65,000 candidates can be included, there is no room for error.

The majority of our screening work is performed by our proprietary Stocksifter suite, which rejects roughly 90% of the candidates available to us on the global stock market.

At this phase of the process, the most typical reason for being rejected is not meeting the Fund’s minimum market value requirement – meaning no companies with a market value of under 200 million USD – or being involved in an industry or sector of the market that has been excluded from Sifter’s portfolio.

Of the numerical criteria used to measure a company, the most stringent ones are related to their return on invested capital and indebtedness.

If a company wishes to pass this phase in Stocksifter and be brought before a human analyst, its return on invested capital must be at least 10% and its net debt/EBITDA ratio may be three at most.

The price of an individual stock is not the most important screening criterion:

Stocksifter ranks each potential investment target by price.

If Stocksifter is like a mean bouncer, Sifter’s portfolio managers are more akin to no-nonsense vehicle inspectors. But whereas a vehicle inspection is used to ensure that a car is fit for the road, our portfolio managers will not settle for the bare minimum.

Only the best investment opportunities will do.

Our analysts begin their investigative process by reading a brief description of the company.

If they find no indication that the company has any permanent competitive advantages, they will end the process then and there.

If a competitor can easily enter the same market, the company will be subjected to constant price competition, which will only squeeze its profit margins.

A company with no competitive edge is of no interest to Sifter.

If, on the basis of the description, it seems possible that the company does indeed possess some type of competitive advantage, our analyst will attempt to verify this by looking into the company’s past figures for the last five to ten years, for example.

Do they any contain promising signs of the profits and stability provided by a competitive advantage?

One good way to check is by looking into the figures from a more tumultuous time: how did the company perform during, say, the 2008 financial crisis?

One other key factor is the company’s ownership structure. This can help us ascertain whether a company’s shares are liquid enough and whether it has any major shareholders.

If the company has a major shareholder who also owns the company’s competitor, a significant client or an important vendor, we will not invest in it.

Sooner or later, this type of structure will lead to an unhealthy situation that will only serve to hinder the company.

Of the qualitative factors we employ, a surprising number of companies are also eliminated when it is determined that their top executives have not been around for a sufficiently long time.

A change in management is always a risk when it comes to ensuring the continuity of company. That is why we believe that a company’s top executives should spend a few years at the company before we can consider investing in it.

Our more subtle criteria include growth, for example.

When it comes to determining the growth of a company, we aren’t interested in just its earning statements – we want to know how it has grown.

For example, the Swedish access solutions conglomerate Assa Abloy seemed like potential investment target at first, but since the company had grown mainly by making a huge number of small acquisitions, we could no longer include it in Sifter’s portfolio.

The integration of an acquisition always includes risks: are there synergies to be found, can the corporate cultures of the acquirer and the acquiree be merged?

Alexander Järf
Business Analyst, Sifter Capital Ltd

Disclaimer. The contents of this page do not constitute investment advice or purchase recommendations for stocks. This page describes our opinions on the companies we have invested in or whose shares we have sold. The past performance of the fund is not a guarantee of future results.
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