From Concentrated Investing: Strategies of the World's Greatest Concentrated Value Investors
Simpson thinks that investment portfolios should be constructed as a collection of pieces of businesses that are reasonably valued, where the investor has confidence that they will be bigger, and more profitable, three to five years from now.
...Though he doesn’t follow any magic formula for investing, believing that investors should keep an open mind about valuation, his favored metric for valuation is price to free cash flow measured on a per share basis. He seeks out those positions in which he thinks the valuation is reasonable, and there will be continued top and bottom line growth such that there’s a better chance of the valuation moving up rather than down over a period of time. While he favors free cash flow, he doesn’t like to be restricted to any single metric. He holds to some basic principles that he has refined over time, requiring a discount from intrinsic value, a high-quality company, and high-quality management. In assessing management, he examines their capital allocation record, their integrity, and whether the business is run for owners or whether the managers are hired guns looking to make money for themselves. This distinction often manifests in the chief executive’s willingness to undertake buybacks when the stock is undervalued.
Simpson believes that companies should buy back stock where it’s appropriate to do so—when the stock is undervalued. He hopes that his positions enjoy a double hit—partially from fundamental growth and partially from buying back stock—leading to an increased valuation on a per share basis.