Buy Discipline
The combination of value/price (V/P) and relative strength leads us to buy industries that are underpriced by our calculations and that are positioned to outperform (see Relative Strength) the overall market. As shown in the hypothetical illustration below, industries with V/P and relative strength readings above 1.0, indicating good bargains and market leadership, generally would be candidates for purchase in this example:
| Industry |
V/P Ratio |
Relative Strength |
Signal |
| Automotive |
1.20 |
1.04 |
Buy |
| Biotechnology |
1.19 |
0.95 |
Do Not Buy |
| Homebuilding |
0.97 |
1.02 |
Do Not Buy |
| Personal Products |
0.98 |
0.97 |
Do Not Buy |
These examples are hypothetical, do not reflect actual performance, and should not be construed as a recommendation of any sector, industry or security.
ICON’s value-based investing model is an analytical, quantitative approach to investing that employs various factors, including projected earnings growth estimates and bond yields, in an effort to determine whether securities are over- or underpriced relative to ICON’s estimates of their intrinsic value. ICON’s value approach involves forward-looking statements and assumptions based on judgments and projections that are neither predictive nor guarantees of future results. Value readings are contingent on several variables including, without limitation, earnings, growth estimates, interest rates and overall market conditions. Although valuation readings serve as guidelines for our investment decisions, we retain the discretion to buy and sell securities that fall beyond these guidelines as needed. Value investing involves risks and uncertainties and does not guarantee better performance or lower costs than other investment methodologies.
While Automotive meets our V/P and relative strength criteria, industries with V/P and relative strength readings below 1.00 would generally not be suitable purchases. Biotechnology, for example, is a bargain based on its V/P, but its relative strength suggests it may be too early to buy. Homebuilding is not a bargain, even though it is showing strength against the market. Personal Products is neither a bargain nor a market leader.
Sell Discipline
Our sell discipline is typically on an industry basis rather than by individual stock, although we evaluate whether individual securities continue to be attractive investments according to our model. An industry might be sold for a number of reasons, including:
- It is overpriced relative to our calculation of intrinsic value.
- Its performance has been poor relative to the market.
We generally sell when an industry drops into the bottom 10% of our V/P rankings, meaning that it has become extremely overpriced relative to other industries. We may also sell when an industry falls into the bottom 20% of a relative strength scale, indicating poor performance.
Stock Selection
Individual stocks are screened for quality. We favor companies that are high in cash, low in debt and well managed. Income statements, balance sheets and ratios are used to assess management quality seeking evidence of control, planning and efficiency. Overall, we look to increase the potential that price will move toward value while reducing the potential for value to deteriorate.
