We try to keep it fairly rigid. When a holding hits some combination of 8x EBITDA, 12x EBIT, or 15x forward earnings, we're going to start selling. Given the types of companies we buy, that means the shares are in the top end of their valuation range and we can't expect enough further upside.
We absolutely want to be constructively engaged shareholders. We have 10 to 15 percent of our capital in each of our core companies, so I think it's imperative that we make our views, particularly with respect to capital allocation, clear. For the most part, management appreciates the faith we're placing in their business and in [...]
We want to see at least a 10 percent free-cash-flow yield and a 6× or less multiple of enterprise value to next year's earnings before interest, taxes, depreciation and amortization [EBITDA]. For enterprise value we use the current market value plus the estimated net debt 12 months out. Most of the companies in our universe [...]
Because five or six unique holdings make up 60 to 70 percent of each of my portfolios, I exclude companies with idiosyncratic risk profiles that I consider unacceptable in such a concentrated portfolio. That means I exclude high-tech and biotech companies with technological-obsolescence risk, tobacco or pharmaceutical companies with big product-liability risks, utilities and other [...]
I’ve always had an affinity for companies that actually make things. We favor companies with transparent businesses that we can understand fairly quickly and those that have large and recurring maintenance, repair, and overhaul revenues from an installed base, such as elevator companies or aerospace-parts firms.