Stonewood identifies investment opportunities on the basis of a “bottom-up” fundamental deep value approach, investing in assets where intrinsic value exists with a substantial margin of safety. In addition Stonewood attempts to identify opportunities in which a potential catalyst for a transaction or other corporate event exists which could result in the value been recognised by the market. These events might take the form of corporate re-organisations, merger or acquisition activity, spin-off transactions, share buy-backs, dividend announcements, shareholder activism or realisation of undervalued/hidden assets.
In assessing the intrinsic value of the security to be purchased, particular attention is given to the Stonewood’s assessment of the value of the security to a “Private Buyer”. The spread between this value and the market price provides a margin of safety and reduction in risk.
While Stonewood believes it is able to identify investment opportunities trading at a discount to intrinsic value and the events that may unlock that value, it is impossible to know when the market will recognise the underlying intrinsic value of the asset. On this basis, Stonewood follows a medium to long term approach. Stonewood believes that the ability to outperform in the medium to long-term is driven by focusing on long-term value investing rather than short-term momentum trading.
Value-investing has wide-ranging interpretations and often focuses on finding cheap assets characterised by low valuation metrics such as price earnings or price to book multiples. As a result, “value investors” may shun high quality investments with above average long term prospects in favour of investments with below average long term prospects – simply because the latter trade on low multiples.
Stonewood adopts a contrarian approach to value investing, and is careful to avoid investments that may appear cheap but carry substantial risk. It may invest in assets that appear expensive, but which have above average prospects or significantly lower risk profiles.