Investment Process
Screening
At Petra Capital Management, we use our in-house developed filtering process and tool to build an inventory of ideas from thousands of publicly-traded and private companies. Our filtering process encompasses the superior utilization of invested capital, stable business model and competent management. A company creates economic profit to the extent that its returns on capital exceed its cost of capital. Therefore, we look for companies that have a long history of deploying large amounts of capital at high rates of return.
Many insights are to be gleaned from the historical record. Exceptional historical performance, however, has predictive value only if the business model is stable – and the moat that protects the business from the ravages of competition (high barriers to entry, indelible franchise, unassailable brand, etc.) persists as a strong protector. Therefore, we look for companies that are not subject to rapid change and/or do not participate in an industry with an uncertain competitive structure, among other things.
We look for management teams that act like co-owners of the business, whose primary motivation is to grow the per-share value of the business over the long term. We prefer management that is at the behest of an independent, well-rounded board. Further, we favor management that has had some hand in the past performance of the business.
In addition to implementing the above-mentioned filtering process, we generate investment ideas from a number of sources, including general business publications, industry database, trade publications and our vast network of business contacts.
Due Diligence
At Petra Capital Management, we use a private equity approach to public market investing. We will purchase shares of a company only after we have formulated a solid opinion of its intrinsic value and only if the purchase price is below that value. We perform our own due diligence on our portfolio companies. By utilizing an integrated approach with deep operating and transaction experience, our team uses a focused and tailored approach to identify and understand potential risk factors, value drivers and other areas of specific interest to our investment decisions. We perform hundreds of hours of research on a company before we become owners. Our research process includes the following:
- Contacting company management, competitors, vendors, and customers
- Thorough study of a company’s financial and written history
- Financial modeling
After conducting thorough due diligence, we appraise a company’s intrinsic value. We consider initiating a position if and when the market price guarantees a substantial margin of safety and the price-to-value relationship offers an expected return greater than 15%. We also constantly monitor our portfolio companies to make adjustments to our appraisals.
Exit Strategy
When we initiate a position, we intend to be long-term owners. Our expected holding period is at least 6 months to 3 years, but we will sell a position when: i) the market price appreciates close to our appraised intrinsic value; ii) there are more compelling yet competing investment opportunities; iii) the appraised value of the business is reduced due to a diminishment of the competitive advantages, poor management or erroneous analysis; or iv) disconfirming evidence negates investment theses due to internal or external changes. Portfolio must be rebalanced continuously, allocating capital from securities with inferior risk-reward to those more compellingly undervalued.
