PATIENT CAPITAL….POSITIONED FOR PROFIT
Philosophy & Approach
We call our core strategy our Fortress Portfolio because its intent is to fortify and preserve your capital through investments in companies that have traditionally dominated their industries and that have proven themselves to be impregnable over many years and varying economic cycles.
Just as ancient townspeople would build the strongest possible walls around them to protect themselves and their property, we build corporate barriers to protect our clients’ investments. This is always sound policy but at Craven Capital, we believe that since 2008, this is even more important. Not only is it important to invest in sound companies with impregnable balance sheets, it is also critically important to:
Expect the Unexpected
We are living in a world of monumental uncertainty. In hindsight, we now see how a financial crisis, borne of excess and easy credit, morphed into a global banking crisis. This banking crisis is now morphing into a continuing sovereign debt crisis. The planet is in the steely grip of the most severe balance sheet recession since the Great Depression. Policy makers have arguably made the situation worse, resulting in the world economy potentially heading towards its second and possibly much more serious global credit crisis.
Know Thy Counterparty (Who Am I Dealing With Anyway?)
As evidenced by Lehman, AIG, Madoff and more recently, Greece and MF Global…during such times of crisis, counterparties are of critical importance. Counterparties can be defined in numerous ways. Some provide safe custody of assets, others are relied upon to pay dividends as expected, while others stand on the opposite side of derivative trades. In each case, it is imperative that one can rely on their counterparty to meet the requirements expected of them.
The market will continue to reflect this uncertainty as the developed nations inevitably deleverage their collective debt (through inflation or otherwise) while adjusting to the greatest demographic transition in history. We anticipate that this process may take the best part of the current decade and involve massive disruption of the status quo. As such, the guiding philosophy behind our Fortress Portfolio strategy is to:
- Trade in the stocks of companies who are best positioned to survive and thrive in an uncertain global environment
- Provide a custodial relationship that ensures maximum security and protection of client assets
- Expect the market to give nothing more than extreme volatility and be prepared and positioned to take advantage of this
The Craven Capital Fortress Portfolio consists of 20 mega-cap companies possessing the following “fortress-like” characteristics:
- Dominate their marketplace
- Derive consistent and reliable free cash flow
- Have a long history of dependable and in many cases, increasing dividends
- Are typically less vulnerable to market shocks (trade in a range of 20% +/-)
4 Examples of what constitutes an ideal Fortress Portfolio company
Company A provides technology-based outsourcing solutions to employers, and vehicle retailers and manufacturers worldwide. The company has increased dividends for 36 years in a row. Over the past decade, this company has raised annual distributions at 14.50% per year.
Company B engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company has increased dividends for 49 years in a row. Over the past decade, this company has raised annual distributions at 13% per year.
Company C develops, manufactures, licenses, and supports a range of software products and services for various computing devices worldwide. The company has increased dividends for 6 years in a row. Over the past five years, this company has raised annual distributions at 11.40% per year.
Company D engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products, as well as transportation and sale of crude oil, natural gas, and petroleum products. This company has increased dividends for 29 years in a row. Over the past decade, this company has raised annual distributions at 7.10% per year.
Portfolio Objective & Investment Process
Our objective is to achieve a total annual return (net of fees & transaction costs) that exceeds the so-called “risk free rate” (3 MonthT-Bill) by at least 6-8% without exposing the portfolio to comparative levels of risk.
This is achieved through a combination of strict stock selection / acquisition, enhanced dividend harvesting and diligent use of call and put option trading.
- We seek to identify a key selection of 20 “Fortress Stocks” from a watch list of between 30-50 qualified companies
- We formulate an ideal target price for each position
- We are disciplined and patient in waiting for the market to provide the buying opportunity
- We sell covered calls against positions we own in order to generate additional premium income
- We sell uncovered (naked) puts against positions we want to acquire whenever it is opportune to do so
- We use stop losses (typically 20%) to provide downside protection against a severe market downturn
We will not sell an acquired position unless:
- We are called away
- We are stopped out
- We agree that the position no longer qualifies as a “Fortress Stock”
Opportunistic Option Strategy
The Craven Capital option strategy consists of covered call writing within the following parameters:
- Target exercise price – 20% above prevailing market price (out of the money)
- Premium income – averaging 2%+ of acquisition price
- Frequency – 2x or more per calendar year (depending on market conditions)
A secondary strategy of uncovered (naked) put selling is utilized to harvest additional option premium while in stock acquisition mode. Puts are fully cash covered per position (no leverage).
- Position sizes limited to 5% of portfolio – rebalanced as appropriate, when appropriate
- 20% hard stop loss per position (non-market) based on acquisition price
- Positions reviewed / replaced only in extreme circumstances
- Opportune trading of volatility index (VIX) to enhance protection in extreme conditions