The start of the process is new idea generation.  Ideas and investment themes are generated internally – we are not broker-led.  This is a key differentiator from most of our peer group.  Because we are spoilt for choice with over 8,000 quoted European small companies below €3 billion in size to choose from, we have become good at generating our own ideas.  Success in this area comes from lateral, creative thinking (thinking outside the box) and from hard work of course.  

We have developed a substantial database of companies which is actively maintained and allows us to screen by investment theme as well as helping us to screen for interesting companies using various financial ratios. 

Once a potentially interesting company has been identified, our Information Team gathers extensive trade information about the industry and the company management as well as broker research if available.  The Information Team is a key resource, helping us to prepare thoroughly prior to any investment, tracking news flow daily and bringing together information, particularly on management, which can be invaluable.

The company is then examined from both a qualitative and a quantitative basis. A potential new investment is allocated to an analyst to complete a detailed qualitative checklist.  Our starting point is determining if a company meets the quality threshold that we seek.  Unlike most others, we do not begin with the numbers.  If it passes the checklist, and  following a discussion within the team, it is included on our Approved List.

Then the number work begins.  We hope Warren Buffett would be proud of us. We value companies in three ways: a traditional discounted cash flow model developed by us over years; a multi-factor valuation tool based on book and relative valuation; and finally peer-group comparisons.  Each analyst follows circa 20 companies and is asked to give a 12 month price target.  Annual bonuses are directly linked to the Analysts' success.  There is a big incentive to get our valuations right.     

Meeting management is a crucial part of the decision making process and of the ongoing monitoring of a company.  One on one meetings are preferred and at least two members of the team attend whenever possible.  As long-term investors, Montanaro are supportive of good management and meet all our investee companies.  We hold around 150 company meetings per year and spend considerable time ahead of each meeting to ensure that we are properly and well prepared.

Summary

Montanaro combine their use of detailed financial models and their fundamental research to bring a company to life.  Small companies are generally under-researched.  Inevitably this provides opportunities for an investor who can make good investment decisions on the basis of quality in-house research.  Montanaro prefer to rely on internally generated earnings per share forecasts rather than external forecasts.  Consensus forecasts are continually reviewed but the emphasis is placed on where market forecasts vary widely and in particular on where Montanaro’s forecasts vary from consensus.