Research Methodology
Our idea generation is a combination of quantitative and qualitative processes. We run our proprietary screens every month on the publicly traded companies in the small and mid-cap segment of the equity market to reduce the set to a more manageable size. These screens are created to marry the financial and valuation attributes we look for in the businesses and we have a successful track record of unearthing winning investments. Typically, a company has to be on three or four screens to merit our attention for further research if it is an unfamiliar name. For each potential candidate, we further analyze the current valuation multiples in comparison to its 5-year and 10-year averages to assess the potential valuation gap Mr. Market may be assigning.
We also pay close attention to the changes in their balance sheet, income statement and cash flow statement ratios to detect the financial strength and/or potential improvement in them. Qualitatively, we also track businesses we have invested in the past, recommendations from our network (including peers and investors), or companies in the industries that are going through secular shift that could yield in material revaluation of its participants. Once we shortlist an idea for further analysis, we are focused on the 3P’s: People, Purchasing Power (of the business), and Price. Banyan Capital does extensive primary and secondary research to understand the track record of the management, strength of the business model and financial performance of the company at hand.
Banyan Capital culls information from public databases, call transcripts, filings with stock exchanges, annual reports, trade journals, meetings with management, competitors, employees, ex-employees, vendors, customers and industry experts, board members, auditors and bankers. Banyan has an extensive network to get data, background and information to arrive at an informed view of the business and its industry. Our research seeks to appraise the worth of a company, what Graham called “intrinsic value,” by determining the value of its assets and/or cash flow. The term “intrinsic value” may also be referred to as private market value, replacement value, breakup value or liquidation value. The process is more closely related to credit analysis as we are as concerned with the return ‘of’ our capital as we are with the return ‘on’ our capital. Banyan Capital has substantial experience in determining the intrinsic value of companies across sectors. Multiple valuation metrics including discounted cash flow analysis, liquidation analysis, multiples such as price to earnings, enterprise value to EBITDA, enterprise value to free cash flow, price to book, replacement cost of assets analysis, and comparative analysis are used, as appropriate to an industry and/or company, to arrive at the valuation of a company.