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Dear Reader,

On this article I want to present the personal importance I place to its title by clarifying the role different financial statements place in our security selection.

During a period of slow economic growth and weak credit expansion, corporates that sell their products in that economy are likely to suffer operating margin and revenue growth headwinds.

In such an environment, many leveraged companies that depended heavily on renewing bank debt are likely to suffer from cutting costs significantly to be able to reduce debt or make interest payments (often losing market share as a result) and even potentially falling into bankruptcy. This allows the lower leveraged companies to take their market share. We are seeing this happen already with companies such as Best Buy, who are taking clients that previously went to circuit city, a large competitor that went bust in early 2009.

As a result, we see the leverage in different companies amongst certain market sectors shift in a manner that closely follows the economic cycle. Low leveraged companies become more leveraged as they take on market share from competitors that are down sizing, default or are bought out due to their misallocation of capital in past years, as the rate of return from investing capital in that sector increases. Investing in low leveraged companies that have the balance sheet to survive a crisis and hence reap the rewards of surviving is one investment strategy we are actively pursuing at Long Term Investment Management.


Yours sincerely,

Alessandro Sajwani