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The Benefits Of Being A "Throwback" Wealth Manager

Tom Burroughes, Group Editor , November 11, 2019

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This publication carries an interview with the US firm Atalanta Sosnoff Capital, which talks about its approach to investment, including the issues around "active" and "passive" approaches.

Here is a profile of Atalanta Sosnoff Capital, a firm operating in the large-cap equities and investment-grade fixed income spaces. Speaking here are Craig Steinberg, chief executive and chief investment officer, and Donn Goodman, senior vice president. Sosnoff caters for high net worth clients, and institutions, and has done so for almost four decades, and the firm oversees more than $6.0 billion in assets. Clients include family offices and broker-sponsored platforms. (Further details below.)

What is your style of stock investing?
Everyone on our team shares the belief that over time earnings drive individual stock performance. We refine that philosophy by focusing on earnings acceleration, a style that we have been developing since 1981. In short, we concentrate on individual companies poised to demonstrate improvement in their business’ rate of earnings growth. History shows that earnings growth rates are a key variable in determining a stock’s valuation. Companies delivering earnings acceleration are typically rewarded with multiple (price/earnings) expansion. The combination of higher valuation on higher earnings over time produces outsized gains in individual securities.  

Sounds interesting but how do you find these stocks?
The focus of our internal research efforts is to pinpoint changes in fundamental drivers. Over the last four decades we have categorized patterns of events which are consistently fertile in creating earnings acceleration. Included in these are new product introductions, industry innovation waves, evolving supply/demand dynamics, and changes in company leadership. As an example of management events, boards of directors often make personnel changes because they are dissatisfied with prior earnings growth. In that case, the new management’s de facto mandate is exactly what we are looking for, earnings acceleration.  

Can you give a more specific example?
Sure. A few years back, Canadian Pacific brought in a new CEO. Previously the railroad was a perpetual underperformer on both shareholder return and just about any operating metric that you could analyze. However, we knew the executive’s background in developing precision scheduled railroading which gave us the conviction to buy the stock. Operations dramatically improved in terms of productivity, margins, locomotive speeds and, eventually, free cash flow. The stock went right along with it. A few years later, that executive went to CSX, and the story played out much the same.

So once you find earnings acceleration, you buy the stock?
No. Anticipating the acceleration is just the first step in our research process. The next step is diving into financial models to gain independent conviction that earnings growth will improve.  The last step and how we discipline that process, is valuation. We are not looking for the cheapest stock but use valuation analysis to ascertain whether the earnings acceleration is already discounted in the stock. To do this, we triangulate by comparing valuation metrics with a stock’s history, industry, and peers in the overall market. We place heaviest emphasis on the relationship of price to free cash flow.

Do you invest in growth or value stocks?
Both. Earnings acceleration is style agnostic in the sense that we can find it in either camp. The railroads were clearly value stocks when we bought them, although valuations had greatly expanded when we sold them. Conversely, we purchased Google (now Alphabet) shortly after its 2005 IPO and still own it to this day. Owning a stock for close to fifteen years is a great way of compounding capital. I wish they were all like that. Today’s portfolio has significant weighting in growth stocks because that is where the innovation is happening.  For example, we are participating in the cloud revolution with serious weightings in Microsoft and Adobe. The portfolio always contains a blend of growth and value stocks. That is why we have been able to perform well in either environments. In short, we are core managers.

In a world of indexing and quasi-indexing, what is your approach to portfolio weightings?
Two principles govern portfolio management for us. First, if we have conviction in an idea, we need to own enough of it to impact overall portfolio performance. Second, if an individual stock, industry, or even sector fails to meet our criteria of accelerating growth and appropriate valuation, we will not buy it just because it is in the index. It is easy to see from these two principles that we are not closet indexers. In fact, we believe that a portfolio needs to be different from the index in order to outperform the index.
 

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