7-Factor Model

The Polestar 7-Factor Model is the basis for our unique methodology in investment research. Polestar focuses on companies that demonstrate some key characteristics:

  • Economic Moat
  • Profitability
  • Owner-Operations
  • Bright Prospects
  • Solid Foundation
  • Compelling
  • Valuation
  • Catalysts

Polestar was founded in May 2005 by Raj Sharma who has 18 years of buy-side and sell-side experience at leading hedge funds/buyout funds and fundamental research firms. Mr. Sharma’s experience in equity research led him to a deep appreciation of the contrarian and value-driven approaches to equity research. Mr. Sharma and the team at Polestar focus on giving his clients the highest quality of investment recommendations.

7-Factor Model

Within the Polestar 7-Factor Model, the investment merits of each portfolio candidate are assessed by assigning grades A (highest) through F (lowest) for each one of the above 7 factors. An investment candidate needs to score an A grade in at least 5 of the 7 factors and at least a B in the other two factors for it to be included in the “Polestar Buy List”. Within this list of investment candidates is a select “Core List” of candidates that typically score an A in each one of the 7 factors.

  1. Economic Moat
    Warren Buffet gave rise to this analogy when he likened a winning company to that of a robust fortress surrounded by a protective moat. Polestar uses this concept in its investment selection process to identify business models that will stand the test of time and the extreme cyclicality of the markets. The company must have created a solid brand and franchise that has attracted loyal and satisfied customers. This economic moat should enable a company to defend and sustain its competitive advantage in the market.
  2. Profitability
    We believe companies with a strong and long-term history of high net operating margins and profitability have the highest chances of succeeding in the future. After years of generating superior returns, a company may have hit a roadblock in profitability; but if its history displays a strong penchant for high levels of industry-beating productivity, the company is more likely than not to regain its prior path of superior profits.
  3. Owner-Operators
    We have a strong liking for companies with founders who are also managers, especially if the owner-operators have high levels of equity ownership in the company. Owner-Operators, in our experience, show a more resilient commitment to leadership, tend to develop company strategy with a longer-term horizon in mind, and tend to be conservative in compensation schemes. On the other hand, we shun Owner-Operators that institute super-voting structures at their companies effectively handing themselves the majority control of the company. We believe a company should remain privately held if its owners intend to hand over only minimal voting rights to existing shareholders.
  4. Bright Prospects
    A company’s ability to grow and expand is one of our key determinants in picking a successful investment. Polestar evaluates a company’s pipeline and backlog, probing for exciting new products that complement market trends. We stress the importance of our investment candidate’s ability to sustain its superior competitive advantages. The ability to maintain or enhance its brand image is important, as is its ability to maintain its leadership in its markets.
  5. Solid Foundation
    A strong balance sheet is critical to the continued success of a company and the likelihood of a high investment return. Polestar strongly believes that companies only reap benefits from assuming operating leverage, not financial leverage. While companies with high financial leverage may generate high levels of return, they often do so by significantly increasing the levels of risk in their capital structure. We prefer companies with low levels of long-term debt and prefer management teams that shun financial leverage when undertaking acquisitions and/or share buybacks. Consequently, Polestar prefers capital structures with sturdy levels of net cash
  6. Compelling Valuation
    Over the years we have found that most companies with an exceptional track record of profitability or returns on invested capital typically trade at rich valuations when compared to their peers and to the market in general. However we seek opportunities to buy great or promising companies when they exhibit cheap to reasonable valuations as compared to their peers, the market as a whole, and their historical levels of valuation. We employ discounted cash-flow models to determine whether a stock is trading at a sufficient discount to its intrinsic value before we recommend it to our clients.
  7. Catalysts
    Although a company may be substantially undervalued, the investment still may qualify as a “dead-money” candidate if there are no clearly discernible catalysts for progress on the horizon. The following are some examples of compelling catalysts with the potential to drive a stock up: an improved earnings outlook; improved visibility of the company on the Street; an impending reorganization; a buyout offer that is expected to unlock substantial hidden value; and a realization that the market has cast a myopic view on a company worthy of broader market influence.