Four key principles guide PRIMECAP Management Company's approach to investment selection: commitment to fundamental research, long-term investment horizon, emphasis on individual decision-making, and focus on value.
First, PRIMECAP Management Company is committed to fundamental research. The primary objective of its research is to develop opinions independent of Wall Street and to understand the companies it follows as well as any industry analyst. The firm looks for stocks where it believes the underlying company's long-term fundamentals will evolve significantly better than the current Wall Street consensus or valuation suggests. This can be a function of greater expectations it has for new products, new markets, new management, restructuring, a structural shift in demand or supply, or other changes in industry dynamics. The firm's research involves interacting directly with the companies it is reviewing as well as their competitors, suppliers, and customers.
Second, PRIMECAP Management Company takes a long-term perspective. The firm looks for stocks that it believes will outperform the market over a three- to five-year time horizon. Portfolio managers strive to recognize values early and patiently wait for the market to reach a similar conclusion. Often, the search begins with companies and industries that are currently out of favor among investors. Consequently, PRIMECAP Management Company's investment ideas are frequently early. However, if the firm believes that the long-term thesis is intact, conviction derived through its research efforts gives portfolio managers the fortitude to stay the course when the near-term fundamentals are challenging.
Most executives are able to craft a seemingly compelling 'sales presentation' of their company to large, potential investors. I don't need any presentation to tell me that TUES is ill-positioned with a troubled business model. TUES whole concept is based upon offering high-end at prices below normal retail. The only problem with this concept is that TUES buyers don't seem to be able acquire these high-end goods at costs that allow them offer consumers great deals on these luxury items. Without a consistent flow of deals, customers don't seek out TUES stores at their secondary locations with their drab interiors. Since the deals were always intended to foster word-of-mouth, TUES has seldom utilized much paid advertizing. (I'll make note of the exceptional Lauren Bacall campaign.) With fewer deals, there's less word-of-mouth. TUES has to contend with TJX which operates bright, well-signed stores in top-tier locations. TJX has larger stores with a much broader range of clothing including children's, teen's, men's, and women's and other goods. The clothes seem to serve as a traffic driver for TJX. What will serve as TUES's traffic driver if it has few deals? There are so many parts broken with TUES, I don't see how it can readily fixed.
Third, PRIMECAP Management Company emphasizes individual decision-making. The firm shuns "group think" and committees whenever possible and relies on individual decision-making in its investment process. The firm believes that individuals, not committees, generate the best investment ideas.
Fourth, PRIMECAP Management Company believes the key to successful investment decisions rests in correctly appraising the relationship between the fundamental value of a company and the market price of its stock. In its judgment, a stock has the potential to be a good investment only if it is purchased at the right price.
Founded in 1983, PRIMECAP Management 's portfolio currently lists 251 stocks, nine of them new, with a total value of $69.9 billion and a quarter-over-quarter turnover of 3%. The portfolio is currently weighted with top three sectors: healthcare at 32.2%, technology at 31.2% and industrials at 13.2%. PRIMECAP Management is a mutual fund firm and the third highest in total value, right below Warren Buffett 's Berkshire Hathaway at $89.03 billion and Dodge & Cox at $84.20 billion.