Investment Approach

Research

At WaveStone, we undertake significant proprietary research encompassing:

  • individual stock reports and models
  • company meetings and site tours as well as conferences both here and overseas.

Our strong belief is that earnings drive share prices and that a disciplined valuation methodology will further enhance investor returns.

Company identification

WaveStone identifies companies displaying sustainable competitive advantage via key 'corporate DNA'.

The interplay of favourable industry factors will leverage returns, e.g. pricing power, positive demographics, supportive government policies and high barriers to entry. 

The companies with the strongest 'corporate DNA' and most favourable industry dynamics will exhibit the strongest sustainable competitive advantage. We invest in companies listed only on the Australian stock exchange or New Zealand stock exchange.  We do not invest in companies with a market capitalisation below $200m.

Quality financial screen

Applying a quality screen test to the companies selected narrows down the choice. These quality tests include:

  • minimum interest cover test
  • minimum cashflow as a percentage of reported net profit
  • above market earnings growth, and
  • maximum PE ratio relative to the market.

An implied growth rate to maturity is signalled in every company's share price. We then determines whether that growth rate is consistent with a company's bottom-up analysis, and a measure of under/over valuation is then calculated.

Risk management

Utilising our existing market experience, short selling expands the range of available investment opportunities, enabling it to harvest returns in both directions (that is, benefiting from outperforming and underperforming stocks), through all market cycles.