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Mid-Cap Equity

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Inception: April 1, 1999

Investment Philosophy

Incepted in 1999, the Mid-Cap Equity Strategy utilizes a disciplined, fundamental bottom-up, valuation-based process to select companies that are inefficiently priced relative to the earnings growth outlook over the next three to five years. We have a preference for companies with products or services that make their customers more efficient or profitable, and are critical to their success. We look for a compelling business model, experienced management, financial strength and attractive valuation.

Investment Process

The investment process includes in-depth internal research, enabling us to identify financially sound companies that offer solid growth prospects, while selling below what we believe is their intrinsic value. Ideas are generated from a variety of sources including SEC filings, industry publications, conferences, sell side research, screens, talking to industry leaders, user experience and competitors of existing holdings. The portfolio managers investable universe includes primarily U.S. companies with market capitalizations similar to the U.S. mid-cap indices.

We use a combination of quantitative screens and qualitative fundamental research to narrow the initial universe of approximately 1,100 securities to the 40-50 securities held in the portfolio. We screen on the following quantitative criteria: top line growth, Price/Earnings, Price/Revenue, Price/Cash Flow and low leverage; all relative to the company’s own history, competitors and the market.

In addition to quantitative measures, we look for companies with the following characteristics:

  • Industry leaders in focused businesses with the ability to grow market share
  • Proven, effective management

An integral part of our investment analysis is interaction with management teams. Meetings and conference calls with management typically focus on issues related to the business outlook, market share/competitive positioning, and company strategy.

The Mid-Cap Advantage

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as of December 31, 2020

Top Ten Holdings*

  1. Tegna
  2. Juniper Networks
  3. Corning
  4. The Charles Schwab Corp.
  5. Magna International
  6. Northern Trust
  7. Check Point Software Technologies
  8. Mattel
  9. Lear Corp.
  10. Donaldson

Portfolio Construction

Additional portfolio characteristics include:

  • Concentrated portfolio of 40-50 stocks
  • 30% maximum sector weight
  • 6% maximum position per holding

Managers

Thyra E. Zerhusen
CEO & Chief Investment Officer

  • Swiss Federal Institute of Technology, MS
  • University of Illinois, MA in Economics

44 years industry experience

Frances E. Tuite, CFA
Portfolio Manager

  • University of Cincinnati, BBA
  • Miami University, MBA

38 years industry experience

Brian M. Washkowiak, CFA
Portfolio Manager

  • Illinois State University, BA

26 years industry experience

Performance

Annualized
Returns (%) as of 12/31/2020 4Q2020 1YR 3YR 5YR 10YR SI
Fairpointe Mid-Cap* 20.27 4.66 -0.15 6.80 8.06 10.72
S&P 400 MidCap Index 24.37 13.66 8.45 12.35 11.51 10.37
S&P 500 Index 12.15 18.40 14.18 15.22 13.88 7.08
S&P 600 Index 31.31 11.29 7.74 12.37 11.92 10.58

*Net of Fees

Commentary

Mid-Cap Equity – 4Q 2020 Review

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Portfolio

as of December 31, 2020

Holdings By Sector*

Sectors % of
Portfolio
% of
S&P 400
(ETF)
Communication Services 12.4 1.6
Consumer Discretionary 17.0 14.2
Consumer Staples 6.5 3.6
Energy 0.0 1.2
Financials 12.8 15.1
Health Care 15.5 11.1
Industrials 16.0 17.4
Information Technology 19.9 17.4
Materials 0.0 5.7
Real Estate 0.0 9.1
Utilities 0.0 3.4

Characteristics*

  • 2021 Calendar P/E  17.0
  • P/Revenue (forward 1-year)  1.4
  • Long Term Debt/Capitalization  31%
  • Return on Equity – 5-year Average  13%
  • Long-Term Earnings Growth Rate (5-years) 8%
  • P/E to Long-Term Earnings Growth Rate  1.8
  • Average Mkt Cap ($mil)  $16,521
  • Dividend Yield  1.2%
  • Turnover (3-year annualized)  25.3%
  • Beta (5-year)  1.14

DISCLOSURE

* The above information is based on a representative account.

Mid-Cap Composite contains fully discretionary equity accounts that follow the mid-cap style.  Mid-Cap Composite represents portfolios that seek long-term total return through capital appreciation by investing primarily in mid-cap stocks. For comparison purposes the composite is measured against the S&P MidCap Index.  The S&P MidCap is a market value weighted total return index that represents the performance of the medium-capitalization sector of the U.S. Securities market.  The index is representative of the type of equity assets invested by Fairpointe Capital. The market index is unmanaged and do not reflect the deduction of fees.  You cannot invest in an Index and the performance of the Index does not represent the performance of any specific investment.  In 2020, the Russell MidCap benchmark was removed from all of Fairpointe’s published strategies. The minimum account size for this composite is $2.5 million. Prior to May 1, 2011 the account minimum was $5 million. Effective March 31, 2013, the account minimum has gone back to $5 million. The Mid-Cap composite was created January 1, 2005. Performance presented prior to May 1, 2011 occurred while the Portfolio Management Team was affiliated with prior firms and the Team was solely responsible for selecting the securities to buy and sell.

Fairpointe Capital is an independent registered investment adviser.

The firm maintains compliant presentations and a complete list of composite descriptions which are both available upon request. Please send inquiries to cbolender@fairpointecapital.com or call 312-477-3300.

Results are based on fully discretionary accounts under management, including those accounts no longer with the firm. Past performance is not indicative of future results. Market, economic, company, and industry specific conditions are considered during the investment selection process. This was a period of generally rising security prices.

The U.S. Dollar is the currency used to express performance. Returns are presented net of management fees and include the reinvestment of all dividends, capital gains, and other earnings. Net of fee performance is calculated using actual fees.

Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request