Investment Process

Peritus’ objective is to provide a distinctive, value-added approach to investing that combines extensive credit work, internally generated research, and active trading.  We believe that investing requires not only skill, but hard work and not cutting corners on the credit analysis process.  As we look for prospective investments, we target credits that possess some or all of the following characteristics:

  • Companies that have a product or service that is considered “essential” or recurring;
  • Hard asset values that provide some support for the company’s value;
  • A manageable capital structure;
  • A stable revenue stream and/or an adjustable cost structure;
  • A company or industry that is out of favor for the wrong or temporary reasons;
  • Excess liquidity; and/or
  • The ability to generate free cashflow.

Once we have identified a prospective credit, we begin the detailed and grinding process of credit analysis.

  • Financial Analysis:  We begin by looking at the company’s three major financial statements—the income statement, the balance sheet and the statement of cash flows—primarily focusing on the company’s ability to generate cash flow (statement of cash flows) and the company’s liquidity and capital structure sustainability (balance sheet).
  • Combined Approach:  In our investment analysis, we combine both “top-down analysis,” looking at the larger economic and industry dynamics, with “bottom-up” analysis that involves a thorough review and analysis of the company’s financial filings, quarterly earnings conference calls, investor presentations, and other relevant documents.  Relevant risk factors are identified and the company’s ability to withstand these factors is assessed.
  • Valuation Analysis:  Peritus does not stop with traditional credit analysis that focuses on business fundamentals, but also undertakes a complete appraisal of the company’s intrinsic value, determining whether the credit is under or overvalued.
  • Capital Structure Analysis:  Through our fundamental and valuation analysis, we not only determine whether an investment should be made in a certain company, but also where in the capital structure (secured, senior, or subordinate) we believe the risk/return is most attractive.
  • Trading Input:  Additionally, our traders are engaged in each step of the security selection process, working intimately with analysts to effectively combine our expertise in market technicals with credit fundamentals.  Because high yield is not an “exchange traded” asset class, the ability to find, negotiate, and acquire bonds is a critical component to execution.

All prospective credits are approved by the credit committee before purchase.  Once a credit is approved and purchased, we don’t stop there but continue to monitor the individual names and portfolio as a whole on a daily basis, quickly identifying any fundamental credit deterioration or downside exposure and overlaying our portfolio positioning with our market outlook.

Peritus’ primary goal is to hold an actively managed, diversified basket of securities that generates what we view as a significant tangible yield to the investor and allows for some potential capital appreciation.  Our preference and history is to hold approximately 40-70 securities in our portfolios, which we believe accomplishes our goals.

To pictorially summarize our process:

  • Identify macroeconomic and industry themes.
  • Identify any contrarian market plays.
  • Look for companies that meet our investment criteria.
  • Screen for yields within our target range.
  • Conduct fundamental credit and valuation analysis.
  • Determine leverage metrics and free cash flow projections.
  • Conclude where in the capital structure we see the best opportunity.
  • Monitor all daily company, industry, and market news.
  • Provide a comprehensive update upon the release of quarterly earnings.
  • Identify any fundamental credit or industry deterioration or downside exposure.
  • Identify expected price upside or downside and execute trades accordingly.
  • Monitor credit concentration.
  • Overlay portfolio positioning with market outlook.

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