New Amsterdam Partners now asks important questions about potential investment candidates that cannot be answered with numbers alone: Does this company make sense in the current economic environment? What is the potential future of the industry in which the company operates? What is management’s growth strategy? Does management have the capability to execute? Does the story behind the numbers make sense?
Our fundamental research goes hand-in-hand with our quantitative research. By thoroughly validating the model’s output with careful scrutiny of its inputs, our fundamental research provides an additional layer of value addition to our process. Quantitative research rarely explains a given valuation completely; oftentimes a review of the fundamental data reveals crucial factors that the numbers alone may have overlooked. Our quantitative work suggests that a given name in our buy universe is mis-priced, and only rigorous fundamental research gets to the root of explaining the reasons behind the mis-pricing. It is our strong belief that a reconciliation of quantitative and fundamental analyses is essential for a full realization of any investment thesis.
The quantitative model steers us towards a universe of stocks that typically outperforms market averages; the role of our fundamental analysis is to determine which names within the buy universe have the greatest potential for outpacing the market. Once individual companies have been identified for more detailed analysis, we examine filings such as 10-K’s, 10-Q’s, and annual reports and read sell-side research, although always with a skeptical eye. We pay particular attention to footnotes in annual reports and regulatory filings. The goal is to validate the inputs of our expected return model, as well as discern any troubling information: Is the long term growth rate reasonable? Does the return-on-equity withstand stress testing? Are the price-to-book valuations realistic?
For each company under consideration we complete a “Fundamental Checklist” which is a breakdown of what we consider to be corporate best practices, which we have compiled over the many years of performing fundamental analysis. This includes a focus on cash flow analysis, revenue recognition policy, debt load and maturity schedules, litigation concerns, effective tax rates, off-balance sheet financing issues, earnings quality assessments, and corporate governance issues.