US equity portfolio manager explains the seven-step investment process

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    the Third step identifies growth drivers. Sanders carries the words of an old mentor – “Always understand what drives sales”. For example, when Sanders first invested in Amazon in 2003 when the stake was $ 17, the online penetration of retail sales in the US was only 3%, but he believed that number would increase significantly over time. He met with Jeff Bezos, who explained his competitive advantages – greatest choice, lowest price, and convenience -, completed his analysis, and bought the stock. Sanders said, “This is an example of a company that has had a clear growth driver – the penetration of its end market with offline retail going online.”

    the fourth step is a balance sheet analysis that goes into detail from a cash flow perspective, while the fifth step is a management team review. Sanders doesn’t care about a company’s newest shiny product, but instead wants to understand the key assumptions that go into his team’s investment process. ESG factors are also analyzed at this stage, including the composition of the board of directors and the compensation model.

    Step six is critical and involves Sanders creating four scenarios – Best Case, Base Case, Bear, and Worst, all of which are five-year minimum discounted cash flow models. The baseline scenario is what he thinks the stock is worth today, an estimate in cents of the dollar, or intrinsic value. If Sanders thinks a stock is worth $ 100 and it is trading at $ 70, it’s 70 cents. He said, “We have this list of companies that we track, and it’s sorted by cents on the dollar every morning. When the stocks hit 70 cents we review the analysis and buy, and when the stocks hit 100 cents we sell. In short, this is our process. “

    These values ​​are updated quarterly, in Step sevenSo it’s a moving target backed up by in-depth fundamental research, where a team of 10 looks at one stock at a time before putting it on the team for debate.

    While many investors are focused on what’s happening this quarter, Sanders told WP that he thinks longer term, an approach illustrated by the March 2020 crash. He saw a health crisis, not a problem with the consumer who ultimately drives the economy. Now in its third money management market cycle, the portfolio manager realized that many elements were indeed in good shape, from millennials with no mortgages, a US real estate market continuing its recovery from the 2008 global financial crisis, and a banking system undergoing 10 years of stress testing the Federal Reserve was doing well.

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