The Process
It probably comes as no surprise that the Provident office is well populated with sports fans, and college football is of particular interest to many of us. Some argue that the expanded college football playoff has destroyed the appeal of the vast menu of non-playoff bowl games, but some, like me, still find a special kind of enjoyment in the quirkiness of games such as the Pop-Tarts Bowl. This year the Pop-Tarts matchup features Georgia Tech taking on Brigham Young University where three Pop-Tart mascots will be devoured by the winning team in what the bowl itself is calling the “biggest sacrifice ever.” Yes, this is very strange, but Pop-Tart maker Kellanova has leaned into weirdness and will also include a dedicated livestream on social media to track the mascots’ antics and eventual demise. Adding to odd traditions is the Duke’s Mayo Bowl, which will feature a vat of mayonnaise dumped on the head of the winning coach. The stakes may be lower than the playoffs, but these games are often fun and can lead to some laughs and a nice break from holiday stress.
Last year, ESPN’s popular pre-game show, College GameDay, added legendary coach Nick Saban to its panel of analysts. Unsurprisingly, his inclusion has resulted in interesting insight. Saban is widely considered one of the greatest college football coaches of all time. He won seven national championships while coaching in college (one at Louisiana State and six at Alabama) and during his 17 years at Alabama won nearly 90% of his games. This level of success understandably resulted in curiosity as to his coaching philosophy and techniques. Saban became known for his emphasis on “the process” and becoming less outcome oriented. This was far from a unique insight for a coach, but his success brought greater attention to a focus on this approach. Saban’s belief was to control what you can control – don’t focus on winning the National Championship, instead break the steps for success down into smaller pieces. What can you do on this drill, on this play, or in this moment? His belief was that if you focused on what you need to do right now to be successful, and did this consistently, the big prize would ultimately come.
There are clearly parallels to investing, where process plays an important role, though in a slightly different context. A well-defined process allows for smaller, repeatable, disciplined steps that are intended to drive the desired results. While it is necessary for process to evolve over time, the fundamental underlying principles should not change. For Provident, our north star is seeking growing, profitable companies trading at reasonable valuations, as we believe these companies provide the best opportunity for long-term wealth creation for our clients.
The key elements of our process have been consistent over time. It starts with the top of funnel idea generation that feeds the watch list that each member of the Investment Committee follows. Coverage areas are broken down by sector, but new ideas for potential inclusion can be proposed by anyone. Each member of the committee follows approximately 30-40 names, with each company adhering to the profile we are targeting of solidly growing, profitable, and a reasonable valuation. Sometimes a company may fall short on one of these criteria, with valuation the most typical stumbling block, but the hope is ultimately the company checks all the boxes, raising the chances it earns a spot in our clients’ portfolios. Idea generation is a combination of art and science, and each portfolio manager has their own process for it, but these key characteristics play a meaningful role in determining if we even will follow a stock for potential portfolio inclusion.
The watch list is dynamic with names getting dropped or added based on company developments, but ideally, we follow companies for years going through earnings releases and transcripts, investor conference transcripts and the like in order to better familiarize ourselves with how they operate and communicate. This understanding earned over time is meaningfully valuable and can allow us to move quickly if an opportunity presents itself or if danger appears. It also helps to filter out companies that give us an uneasy feeling or deserve the “too hard” pile.
For those companies that have earned a slot in the portfolio, we do not passively decide to hold them, and they are subject to continued scrutiny. The goal is to own a portfolio position for decades, but it is the rare company (for any investor) that earns that distinction. While portfolio changes can be made at any time based on company developments, we meet quarterly following earnings season to re-rank our holdings and present “challengers” for portfolio inclusion. The goal is not to heap praise on the names we already own, but to look for potential vulnerabilities. This means existing positions need to continue to earn their slot in the portfolio and we are constantly looking for potential upgrades.
This general overview of our process in this article does not cover all the details and doesn’t delve deeply into important aspects of portfolio construction, but I think it maps to the general concept of smaller, repeatable, disciplined steps. This is not to say there aren’t other successful approaches, but this is the one that resonates with us, has proven successful in the past, and offers a sensible path in pursuit of future success. Over the long term it is earnings that are the primary driver of stock appreciation, and if done skillfully, buying growing, profitable companies with reasonable valuations should lead to successful long-term outcomes.
Provident is protective of our process but always looking for ways to improve. We are evolving but are attempting to do so in a moderate and thoughtful way. Large fundamental shifts are rarely successful and indicative of squishy overarching principles driving an investment strategy. One example of our modest evolution is we have started making greater use of smaller initial position sizes. Given our traditional, relatively concentrated positions, the bar for portfolio inclusion was particularly high, occasionally preventing us from owning certain strong performing stocks that we had previously identified but had passed on for one reason or another. In acknowledgement of investments with more uncertain profiles but that still in our opinion offer an attractive risk/reward tradeoff, we have selectively used smaller initial position sizes to broaden the opportunity for inclusion for some of our challengers.
We continue to focus on executing the process that has historically served our clients well. While it may undergo tweaks over time in an effort to evolve and improve, the bedrock principles upon which it is based remain unchanged. We continue to believe that investing in growing, profitable, reasonably valued businesses remains a sensible way to build wealth over the long run.
James M. Skubik, CFA®