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The Importance of Being Picky

By Stansberry Research Interview Series
Tuesday, October 31, 2006

Yesterday, I gave you a brief description of the “Kings of Private Equity,” American Capital Strategies (ACAS).
 
Today, I’ll show you how ACAS has beaten every major index as well as most every mutual fund in existence over the last decade. In the last 10 years, ACAS has shown investors an average annual return of 22%. It’s paid out over $21 in dividends. And its current yield is 8%.
 
How did ACAS do this?
 
The analysts at American Capital Strategies have learned the art of being picky.
 
Since 1997, ACAS has invested over $10 billion in 229 privately held companies. I know it doesn’t sound like ACAS is being too picky by investing in some 20 companies a year... But only 1.4% of ACAS’s potential deals reach closing. Tom McHale, ACAS’s senior vice president of finance, walked me through a given American Capital deal last week.
 
It’s a multistep process that starts with American Capital’s principals (think investment talent scouts) meeting several times with a potential buyout target’s management. Having researched the company’s historical performance, operations, and management, the principals issue a 50-page report to American Capital’s Investment Committee.
 
After this, a team of three to four of American Capital’s 53 accountants combs through the company’s finances and issues a report of its own.
 
American Capital also employs an Operations Team, comprised of seven ex-CEO/presidents, four ex-CEOs, and four supply-chain management specialists. These guys look over the company’s operations and issue yet another report.
 
American Capital will then hire industry specialists and other third-party consultants to investigate management’s background, issue psychological assessments, and offer a legal review of the deal.
 
Having looked over all of this material, the Investment Committee decides whether or not the company meets American Capital’s standards.
 
And even then, the Investment Committee has to report to American Capital’s directors, who can veto the deal at any time. Only if the deal passes muster is it closed.
 
Like I said, ACAS is picky... only 1.4% of prospective deals reach closure.
 
These guys are the kings of private-equity deals. They produce Warren Buffett-like returns and pay an 8% dividend.
 
I like American Capital’s approach so much that I added the company to the Inside Strategist portfolio in July 2006. We’re already up 26%, and the stock just hit a new 52-week high. I don’t plan on selling this stock... ever.
 
It pays to be picky.
 
Good investing,
 
Graham




Recent Articles
Market Notes
Conglomerates Procter & Gamble and Colgate-Palmolive both hit new highs.
 
$20 billion restaurant supplier Sysco at new 2006 high.
 
Gold hits new monthly high.
 
Earnings today: Archer Daniels Midland, Cameco, Cummins, Lowe’s, Martha Stewart, and Under Armour.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 37.77 +1.5% -2.8%
Gold 135.20 -0.1% +13.4%
Silver 27.93 +0.4% +47.9%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 19.39 -9.2% -8.2%
Gold Stocks 564.53 +1.3% +10.6%
10-Year Yield 3.00 +1.4% -9.6%

World ETFs
Symbol Price
Change
52-Wk
USA 122.56 +1.3% +10.2%
Canada 30.44 +1.3% +13.8%
Russia 21.63 +2.3% +16.7%
India 37.73 +1.9% +20.0%
Israel 16.47 +0.9% +9.7%
Japan 10.58 +1.0% +7.4%
Singapore 13.88 +1.0% +19.2%
Taiwan 14.72 +1.6% +17.8%
S. Korea 56.56 +1.7% +22.8%
S. Africa 70.85 +3.9% +22.9%
China 45.06 +1.4% +0.1%
Lat.America 52.82 +1.4% +6.7%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 136.18 +1.5% +14.8%
Big Pharma 64.13 +0.6% -3.3%
Internet 72.13 +0.7% +22.3%
Semis 16.03 +2.1% +28.9%
Utilities 31.21 +0.3% +1.6%
Defense 18.51 +1.3% +10.1%
Nanotech 9.99 +1.3% +0.0%
Alt. Energy 9.95 +1.4% -4.4%
Water 18.31 +1.1% +12.2%
Insurance 16.07 +1.2% +18.3%
Biotech 20.58 +1.1% +27.1%
Retail 19.65 +0.1% +28.4%
Software 24.59 +0.9% +24.1%
Big Tech 53.73 +1.0% +21.9%
Construction 12.99 +2.1% +13.3%
Media 13.57 +1.1% +25.0%
Consumer Svcs 67.26 +0.8% +23.3%
Financials 54.87 +2.4% +5.2%
Health Care 64.22 +0.7% +1.3%
Industrials 63.25 +1.6% +19.7%
Basic Mat 73.57 +1.6% +21.6%
Real Estate 55.24 +1.4% +23.8%
Transportation 91.17 +1.4% +25.6%
Telecom 22.48 +1.1% +17.1%