Search for Growth: We perform market research to determine if the industry will see increasing demand for its products or services over time. We believe secular growth to be more attractive than cyclical growth.

  • Sustainable Growth Rate versus Market Expectations: Company specific research is performed to determine the sustainable, forward-looking growth rate. We then search for discrepancies between the sustainable growth rate and current market expectations (as measured by valuation). Current market expectations are determined by using a combination of published street earnings expectations, historical valuations, and current valuations. This logically leads us to the next step in the process (valuation).

Screen for Valuation: We screen for stocks trading at least one standard deviation below their mean. By definition, a stock trading one standard deviation below its historical average has an 84% chance of multiple expansion and 16% chance of multiple contraction.

  • Valuation Measures: Certain valuation metrics are more relevant for some industries than others. We use price/earnings, price/book value, price/sales, and price/cash flow when appropriate.

Analyze for Quality: Our research team then performs detailed research on the individual companies that have met the growth and valuation screens. We utilize a combination of detailed financial statement analysis, street research and key analysts, our past experience, and our market research and experiences. We look for the following:

  • Attractive Industry: We look for companies that exist in growing, global markets with high barriers to entry, fewer competitors, favorable or improving regulatory environment, etc. They should exhibit low capital intensity and stable demand.
  • Favorable Industry Trends Emerging
  • Sustainable Competitive Advantages: We look for competitive advantages such as patents, scale, brand recognition, distribution advantages, technology, etc. Companies with these characteristics tend to generate higher margins, earnings, and returns on capital for longer periods of time.
  • History of Earnings Consistency: We place high value on stable and predictable historical earnings and cash flows. We place high value on companies that generated solid revenues, earnings, cash flows during both strong and difficult economic periods. Other characteristics we look for include free cash flow generation, low debt levels, stable/high profit margins, and high or improving returns on equity.
  • Strong Management: In order to judge the strength of a company's management we look for a history of success, improving operations, industry leading vision, returning cash flow to (dividends, debt reduction, buybacks at attractive prices) and intelligent acquisitions.

Thompson Investment Management, Inc. services involve the management of securities which fluctuate in value due to changes in securities markets, client preferences and other reasons. Thus, Thompson Investment Management does not guarantee any rate of return will be realized, or that losses will not occur, from receiving its services.

© 2008 THOMPSON INVESTMENT MANAGEMENT, INC