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The Peridot Capital Investment Philosophy Peridot Capital
Management manages individual client accounts using a long term, contrarian,
value-oriented investing approach. Our strategy is based on historical stock market data
dating back to the 1800s which shows a direct inverse correlation between
stock valuations (measured by price-earnings, price-to-sales, price-to-book, and price-to
cash flow ratios) and future share price performance. Simply put, the lower the valuation
the higher the future return, on average. This seems logical; the better deal you get when
you invest in something, the more profit you are likely to earn. When looking for new investment opportunities, our core strategy is to focus on stocks that the market is shunning in the short term, which results in depressed share prices and low valuations. With each passing day Wall Street is becoming more and more focused on the short-term. In the age of hedge fund traders and the rapid electronic exchange of information, people react quickly and strongly to new information. Data points like what an analyst had to say about a stock today, or how sales will be this month dramatically affect day-to-day stock price movements This presents longer term investors with plenty of opportunities to find bargains. At Peridot Capital we seek to take advantage of this ill-advised obsessiveness over the short-term. Our best investments are made when we find a strong company that has a bright future but has hit a temporary speed bump. Successful investing involves finding stocks where the longer term fundamentals appear be more optimistic than near term market sentiment is indicating. When the bar for a company has been set very low, the odds of its future performance exceeding consensus expectations (which is the key driver for future stock price appreciation) are fairly high. Over time, as investors see the true underlying fundamentals of the company, the stock should rise to a more reasonable estimate of fair value and substantial profits can then be realized. As for time horizon, we typically share the common "3-5 year" definition for "long term" investing, but predicting what the business landscape will look like 5 years from now is very difficult. Most of our stock investments have catalysts that should result in upward revaluation within 1-3 years of the purchase date. The Importance of Valuation Cannot Be Understated The following example illustrates why investing
in companies that are simply doing well, without regard to the price of the stock, can
often lead to disappointing investment returns. Consider Wal-Mart in 1999. The retailing
giant was growing rapidly and gaining mar What happened? Well, the optimistic view on
Wal-Mart's business proved correct. In fact, sales and profits at Wal-Mart more than
doubled between 1999 and 2005. So the stoc
This is a perfect example of why great
companies do not always ma Investors expected big things from Wal-Mart in
1999 and the stoc Copyright © 2004-2010
Peridot Capital Management, LLC |