Earnings growth drives stock appreciation. SKY Investment Group believes that long-term earnings growth is the ultimate driver of share price appreciation. Therefore, preferred investment candidates are companies that we feel can grow their earnings faster than the economy for a prolonged period of time. Our preferred investment horizon is ten or more years, so we look for companies that dominate their industries and are likely to continue to do so.
Dividends are an important source of return. Dividends have historically accounted for about 50% of the returns generated by common stock and they provide portfolio stability when financial markets turn difficult. As a result, we tend to favor companies that pay and increase dividends regularly.
Management quality matters. One of the best measures of the effectiveness of corporate management is the trend in a company’s profitability. We generally prefer to invest in companies whose profit margins are stable or rising and where management is careful about allocating capital. Poor capital allocation decisions ultimately penalize shareholders through declining corporate profitability.
Don’t overpay. Even the best company can be a poor investment if it is purchased at an excessive price. SKY looks closely at every investment candidate to try to determine the company’s true value. If we feel the valuation is excessive, we avoid investing in the company.
Avoid unnecessary taxes and transaction costs. Since many of our clients are concerned about capital gains taxes, we try to limit portfolio turnover. Recently, our portfolio turnover has averaged about 15%, which compares favorably with many institutional strategies with turnover rates of 100% or more per year. Although circumstances can change, we always do our best to balance the cost of taxes versus the risk of loss that can arise from holding an overpriced stock or bond.
“One should never confuse investing with speculation. Investing is what one does with permanent capital to preserve it, grow it and/or generate predictable income. Speculation is something one does with highly discretionary cash flow that one is willing and able to lose.”
— RJ Pye, Associate Portfolio Manager at SKY Investment Group
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