D&G’s equity investment philosophy is long-term in orientation and is grounded in the knowledge that investing in stocks selling at a discount to their long-term intrinsic value has historically provided excellent returns while avoiding undue risk. Our philosophy emphasizes relative, as opposed to absolute, valuation measures recognizing that the economics of different types of businesses cannot all be analyzed by a single absolute standard. More specifically, this philosophy recognizes that “value” is largely a function of the underlying company’s profitability, and businesses with superior (or improving) economics (e.g. profit margins, returns on capital, market share position) have a higher intrinsic value than businesses with inferior economics. Thus, a low price-to-earnings multiple does not, in our view, automatically equate to attractive valuation (the low multiple may be well-deserved), and, conversely, a stock with an above-market multiple may indeed be a value stock.
The core component of our equity portfolios (as well as the equity portion of our balanced accounts) is comprised of large capitalization, high-quality stocks with attractive relative value. Relative value is determined through an analysis of a stock’s own trading history, viewed separately and in the context of peer and market valuations. D&G’s core holdings typically have lower valuation characteristics (P/E, Price-to-Book, Price-to-Free Cash Flow, PEG ratio, etc.) and superior profitability ratios (Return on Equity, Return on Invested Capital, Earnings Growth, etc.) than their peers and/or the market.
D&G supplements the large-cap core holdings with some exposure (10% to 40%) to quality mid-cap ($1 to $5 billion market cap) and small-cap ($100 to $999 million market cap) stocks. As a general rule, these holdings must meet the same valuation criteria as the large-cap holdings, however, some of these stocks may be classified as “special situations.” These special situation stocks may or may not meet the firm’s valuation criteria, but the investment thesis usually includes some special theme or catalyst that implies significant price appreciation potential and compelling risk/reward characteristics. In addition to individual equities and depending on client requirements, D&G may use exchange traded or closed-end funds for non-core asset class exposure (e.g. socially responsible investing, international, small cap) to fully diversify client portfolios.