Blue Oceans Capital looks at over 100,000 companies.
In looking for new opportunities we need to know we have covered all possibilities. To do this we use our six-stage approach.
STAGE 1: INITIAL FILTER OF A GLOBAL DATABASE OF OVER 100,000 OPPORTUNITIES
Rather than attempting to pick an individual sector, Blue Oceans screens every stock on global listed exchanges. That involves a search of over 100,000 opportunities. We use a couple of metrics to screen for profitability and growth and we do this four times a year after results come out. In this way we know we are aware of all opportunities meeting our criteria. The resulting list is many 1000’s of companies long.
STAGE 2: DETAILED ANALYSIS OF THE BUSINESS MODEL DRIVERS
We then manually assess each business model considering sustainability, drivers of price and volume, and our ability to understand the company. Working our way through 1000’s of stocks takes many weeks. With all results now out, we’re currently working our way through this list from the July quarter.
STAGE 3: DETAILED FINANCIAL STATEMENT AND NOTES ANALYSIS
If a company makes it through stages one and two we then jump into its financials. We look at every line item and its corresponding notes. We also go through the notes carefully to be sure we understand each item. This includes things like reserve accounts. We must know what they relate to, their balance, the adequacy of those balances and their changes over time. If there have been movements in reserve accounts we need to find out why and how that transaction was accounted for. We also look for any off-balance sheet commitments and pay careful attention to items such as the capitalisation of intangible assets. At this stage we also like to see how executive remuneration links to company performance. Alignment of incentives to revenue and net income is quite important.
STAGE 4: INTRINSIC VALUE AND COMPETITOR ANALYSIS
We reproduce the income statement to derive distributable earnings as opposed accounting earnings as stated in net income. At this stage, we also take a close look at competitors. It’s important to understand their strategy and how it compares to the company in question. We take into consideration their financials as well.
STAGE 5: DETAILED SUSTAINABILITY ANALYSIS
We use a thorough sustainability analysis procedure developed with the United Nations Principles for Responsible Investment. This takes a close look at factors involving environmental, social, and governance performance.
STAGE 6: MANIPULATION CHECKS AND BALANCES
Here we are looking for any attempt by management to manipulate their accounting in order to boost their results. It also looks at any attempt to mislead investors. We have developed our own method of checking for this which involves 143 data points, 46 calculations and interrelations between those points. We also take the time at this stage to read at least three years of annual reports cover to cover and all company releases. We gather data from a variety of other sources at this stage also.
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