Screening and Generating Investing Ideas – Katana Asset Management (Romano Sala Tenna) – Fund Manager

*Published in LiveWire Collections November 2016 –

  1. Can you share one of the most effective ways you generate new stock ideas?

In a word, the most effective way to generate new stock ideas is to be relentless.   Relentless in talking with advisers and other investors.  Relentless in what you read.   Relentless in meeting with management.   And relentless in developing sources for new ideas such as forums, conferences, newsletters, economic commentary, trade publications and quant screens.

As JOHN Maynard Keynes wrote:  ‘The game of professional investing, is intolerably boring and over exacting to anyone who is not entirely exempt from the gambling instinct.

Of the above, if pushed to highlight one area that has provided the highest likelihood of success, it would be developing a wide network of quality advisers.   Ultimately we still have to put every idea through our internal selection process and needless to say, we will never abdicate the decision making component.  But an experienced adviser/broker/analyst who understands the nuances of the market, can provide the best ideas with the highest likelihood of success by applying their own time, logic, experience and filters.

However a word of warning: all investors are impacted (to varying degrees) by the views of others, so just as it is important to filter out bad ideas early in the process, it is even more important to be vigilant in filtering out ‘bad’ advisers.


  1. Once identified, how do you filter these ideas down to determine the best opportunities?

The vast majority of investment ideas are quickly filtered by some relatively apparent impediment, such as an inherently dangerous balance sheet, poor valuation metrics or a terminal business model.

This high level but rapid assessment is critical in eliminating ideas early in the process, to enable the majority of time to be spent on the better prospects.

The handful of ideas that survive, then move into the Investment Process proper.  Every investment idea at Katana is mandatorily assessed and rated on 10 criteria:

  1. Management  & Organisational Culture (also ‘Corporate Culture’)
  2. Business model  (short-medium term advantage) & Competitive Advantage (medium-long term advantage)
  3. Valuation metrics including Price Earnings Growth (PEG) ratio, Price to Earnings Ratio (PER) and dividend yield
  4. Macro and sector outlook
  5. Appropriate price action; we seek to move ‘in harmony’ with the greater market and in this respect technical analysis provides insights into investor sentiment
  6. Strong balance sheet, indicating safety, prudent management and flexibility
  7. Quality of Earnings (6 key assessments)
  8. High Operating Cash Flow (OCF)  & High Free Cash Flow (FCF)
  9. Return on Equity (ROE), Return on Price Equity (ROPE) & Return on Assets (ROA) ~ to assess effect of gearing on ROE
  10. Liquidity and Size.


  1. Can you give an example of one stock that has recently passed your filters?


Premier Investments Limited (PMV) is the most recent investment addition to our portfolios.

Of the ten key criteria that we mandatorily assess, none are more important than management.   And none are more difficult to assess or qualitative in nature.   In the case of PMV, we see arguably the best and most successful retail team in Australia, headed by industry veteran Solomon Lew.   Furthermore, we see an extraordinary alignment of interests, with the key staff owning approximately 42% of stock on issue.

PMV also boasts an attractive valuation which is ostensibly underpinned by double digit earnings per share (EPS) growth over our 3 year forecast period.   PMV scores well in respect to operating cashflow and also quality of earnings, which can prove problematic for retail stocks.  ROE and liquidity are also both reasonable.

And given our pre-disposition with capital preservation, the balance sheet is essential to every investment thesis.   PMV rates highly in this regard, with net cash approaching $200m plus circa $300m in Breville Group Limited (BRG) stock.

Katana Asset Management, an Australian Funds Management Firm (Katana Australian Equity Fund)



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