From Aoris Investment Management’s quarterly letter:
We actively avoid businesses that are not growing in value and those where we assess the risks of disappointment to be high.
As such we eschew, at all points in the cycle, highly cyclical and financially leveraged businesses such as banks, insurers and resource companies. We expect this to serve us well over the fulness of the current downcycle.
We also avoid telecoms, tobacco, gaming and most consumer staples, retailers and health-care businesses. The second group of companies has seen share prices perform relatively well since the onset of the downturn, benefiting from a perception of "safe haven". We see these companies as having risks and structural pressures that may have been temporarily forgotten but have not gone away, and we will benefit from avoiding them over our investment horizon.
The types of businesses we do seek to own are leaders in their market where the size and scale that comes with being the number one is a distinct advantage.
In order for businesses to become more valuable over time, it is not necessary that their earnings only ever increase. We fully expect to see earnings declines this year for most of our holdings. What we don’t want to see is the external environment resulting in any of our businesses becoming materially less valuable.
What we are looking to see from the companies we own is that they emerge from the downcycle competitively stronger. We expect them to take market share at a rate faster than normal, as weaker peers lose ground.
We consider a net debt to ebitda of below 2.5x to be comfortable. In the current environment we would prefer below 1.5x, though we give consideration to the degree of stability or cyclicality in the earnings of a particular business.
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