Sio generally evaluates four parameters when considering a potential investment: catalysts, valuation, sentiment, and the ‘investment thesis/story.’ The more these factors positively align, the more likely the stock will find a place in our portfolio. When thinking about investments, we seek to understand why an opportunity has arisen, where our expectations differ from Wall Street analysts, and when we will get paid. We seek both upside potential and downside protection. We are willing to be patient until investment opportunities are compelling.

Sio has a “value” orientation. Our financial analysis routinely includes an assessment of balance sheet quality and cash flow generation. We are looking for opportunities to “find a dollar that we can buy for 50 cents.” Valuation alone is rarely sufficient as a single driver for an investment. We look for catalysts that will change sentiment and drive stock performance/investment returns.

In considering the investment thesis that underpins a stock, we search for unfolding corporate narratives that will garner enthusiasm and drive price-to-earnings (P/E) multiple expansion. We look for business models where there is opportunity for revenue growth or operating margin expansion is greater than Wall Street analysts realize. In such cases, current valuations often reside at a meaningful discount to our assessment of fair value.

Catalysts are among the most important drivers in identifying good investments. These may include corporate earnings that beat (or miss) Wall Street analyst expectations, regulatory changes, changes in market dynamics, and occasionally scientific/clinical trials.

Sio’s “net” exposure may vary depending on the number of and conviction in our longs and our shorts at any given point in time. Our short investments serve the added function of insulating our portfolio from broad market declines.

Our portfolio of investments is diversified by market cap, subsector, and investment thesis. The stocks in our portfolio are diverse, heterogeneous, and uncorrelated. Predicting the future is challenging and not every investment will work for us, but our expectation is that every investment, both long and short, will deliver returns on its own merits.