In searching for ideas, Cardinal Capital Management draws upon its experience to identify investments with respect to which it can gain a competitive edge. This edge may be the result of sifting through inefficient market niches and gathering information on companies that are not yet well known or from developing opinions on businesses that are contrary to prevailing thinking. They look for companies with predictable businesses that generate free cash flow and that have competent and motivated management teams. Cardinal also investigates corporate events that serve as catalysts to cause the market to reassess the investment’s prospects or signal undervaluation.

Once investment opportunities are identified, Cardinal performs intensive due diligence, which includes analyzing regulatory financial disclosures and speaking with industry experts, other investors and company management. The firm’s goal is to know more about the businesses in which it invests than other outside investors. The information that is gathered is used to create detailed five-year projections of each company’s accounting statements.

These projections are used to set Cardinal’s buy and sell prices for an investment. The buy price is based on a 20% discount rate and conservative multiple of cash flow. A lower discount rate and a more aggressive terminal multiple determine the sell price target. The multiple will vary based on the consistency and quality of the cash flow and multiples of publicly traded competitors and recent transactions. Cardinal will also sell its investment if the business model becomes unpredictable or there are more attractive investment opportunities.

Cardinal’s portfolio is constructed through consensus decision-making, with one analyst retaining primary responsibility for following each company. The portfolio of approximately 50 stocks is weighted towards the best ideas while being broadly diversified across industries.

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