Muhlenkamp & Company, Inc. Frequently Asked Questions

How do you minimize the impact of taxes?

We work at it. We try to keep our losses short term and our profits long term.  We also choose companies and trends with a long-term view.  We don’t just trade stocks.

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Why is ROE so important to you?

We’ve done studies and concluded that over time prices revert to values of companies –and values of companies are heavily determined by their return on equity (ROE). Plus, ROE is relatively stable –and useable across industry lines. For example, if we look only at margins, the margins in a grocery store are a whole lot different than the margins in a steel business because the turnover is so different. When you use ROE, the numbers allow comparisons that are valid across a broad list of companies and industries.

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How do you conduct your research?

We begin with various databases, looking for companies with good ROE and modest price-to-earnings (P/E) ratios. As a working definition, ROE is the rate of return of earnings based on the equity capital. It has averaged roughly 14% since WW II, so that becomes our starting point. If the numbers look good, we dig deeper by checking financial statements and annual reports. If satisfied, we call the company’s management. Our three favorite questions are:

     
  • Are there analysts on Wall Street who do a good job covering your company? (That saves us time because we can work off their efforts.)
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  • What metrics do you use to judge your company’s performance? (Some use ROE, some use Discounted Cash Flow, others use Economic Value Added, and so forth; all those are valid, but we want to know what they use.)
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  • At what point on that metric do your executives or employees start earning a bonus? We want to know what they’re trying to accomplish with shareholder money. (Sometimes they set their hurdles too low, in which case we’re not interested. Our job is to figure out whether the company will reach its goals and figure out what we’re willing to pay for that.)

Finally, we talk with the company’s customers. If the customers are happy, the company is doing something right

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To what extent do you use cash?

We use cash in two ways:

     
  • As a “parking place” between the sale of one position and the purchase of another.
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  • As a portfolio hedge when we see risk in the marketplace.

In 1972, the group I was working with saw increasing inflation causing a major negative in the big picture (we would now call it a climate change) and went to 50% cash. At various times, when we’ve seen the Fed raise interest rates to slow the economy (raising risks in the intermediate term), we’ve gone to 20-25% cash. When the big picture and intermediate picture look good, but we see psychology risk in the current market, we’ll hold 5-15% cash. Back to Top

Do you buy foreign securities?

We buy foreign securities, but only when they meet our criteria and they look better than their domestic counterparts.

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Is your investment style value-oriented or growth-oriented?

Both, but we consider profitability (return on shareholder equity) more important than growth. We then try to get that profitability at a value price.

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