We use scenario analyses to project an optimistic case that reflects our assessment of future demand, improving technology, and/or a company’s market share. Thus our assessment of revenue growth and profit margin expansion (in a Base case or Best case) may be higher than consensus 'sell-side' projections.
We identify and value under-priced or over-priced assets from an ESG vantage point. For example, we consider Mohawk’s materials sourcing “best-in-class” from an ESG perspective. Over 50% of the company’s finished goods are derived from recycled materials, such as plastic bottles, tires, PVC pipes, and glass. Making some products from 100% post-consumer recycled PET plastic soda bottles. In fact, the company utilizes 20% of all recycled bottles in the US.
We believe the market generally does not correctly reflect environmental or social risks and opportunities. We focus on exploiting this market inefficiency by defining an investment universe based on quality ESG factors. In our view, even the best run companies are still vulnerable to low-probability high-impact developments. For example, companies producing the highest cost raw materials, operating in locations with egregious human rights abuses or unethical contracting practices could see their businesses threatened by a sudden paradigm shift.