Signia Capital’s investment process is focused on buying assets. Signia uses a value based investment process that looks for the intersection of three important criteria:
As a buyer of assets, the most important screening characteristic is low price-to-book value. Investing in companies with low price-to-book has been proven by numerous academic studies to provide superior investment returns over a full market cycle. Our tangible book value focus seeks to provide a greater margin of safety or lower downside risk control than p/e, p/s, and p/cf focused investment processes.
As an asset buyer, one way to minimize security risk is to avoid heavily leveraged companies by requiring strong balance sheets. One of the biggest risks to a company that has fallen out of favor is their ability to survive if economic or industry conditions continue to deteriorate. To protect the assets or the book value of our investments we require companies to possess low debt-to-capital ratios. In many cases, our companies not only have little to no debt but have excess cash on the balance sheet. This allows them to increase shareholder value through share buybacks, dividend increases, and accretive acquisitions. Quality balance sheets provide the important luxuries of both time and flexibility to weather the storm and act as another element of risk control at the security level.
The majority of Signia’s research process is focused on the qualitative search for catalysts. Finding catalysts requires fundamental investigative work combined with a skill set built on experience. A company can trade at or below its book value, have little or no debt, and its price can remain unchanged for a long time. This is the classic value trap. Signia requires that a company possess definable catalysts (cyclical, secular, or company-specific) that will enable the company’s intrinsic value to be recognized. The more definable events or catalysts we can identify the greater is our conviction for the stock.