The Hedgehog Philosophy

10/8/97 - The Hedgehog is a guide for the aggressive investor. We offer recommendations and reviews of companies you might want to short, on companies you might only want to buy for a short time, and for companies you might want to hold for a very long time.

While we are aggressive in style, our methodology for evaluating companies is fairly conservative. We look for both value and growth potential in the companies we recommend. For a long term buy, we try to find companies that have a long term growth potential(LTGR)/PE that is high compared to both the market and the competition. We usually lean toward companies that are making money and have a lot of room left to expand. We are somewhat contrarian in trying to find companies that Wall Street hasn't fully recognized or is just starting to recognize.

Our short recommendations follow the opposite tack. We look for companies that are significantly overvalued based on all reasonable estimates of their earnings. There are plenty of these of course. The key is in looking for the peak. One way is looking for companies that have made a dramatic rise based solely on a good story. Another is by comparing their market caps with more reasonably valued competitors. The stocks we recommend for shorting are ones that people are beginning to realize have achieved a market cap totally out of line with their value.

Our momentum buy recommendations try to look for companies that will be good long term bets if the short term doesn't pay off. The main thing we look for here is stocks that the market may be on the verge of recognizing for one reason or the other. This is somewhat of an art. The stock's recent price history, a favorable cyclical event, or an expectation of an earnings surprise all may be clues toward a good short term buy.

We are on a somewhat slippery market slope that may continue to rise but could easily go into a nice correction. We believe that significant returns can be made by playing both sides of the market. Properly done, hedging can allow you to profit both when the market is going up and when it is going down.

The Hedgehog is not a tout sheet. Obviously, we are going to own some of the stocks we recommend. After all, it wouldn't show much faith in our evaluations if we didn't occasionally act on them. The difference between us and everyone else, is that we tell you our financial interest in a company so you can decide for yourself whether our review is based on logic or our own bias.

This is important. Ultimately, this is your money you're investing. You must decide what to do for yourself. I would be horrified if someone told me they bought a company they'd never heard of before based solely on our recommendation. Of course, this happens all the time. A big name broker issues a recommendation as if he were Moses coming down from Sinai, and an hour later the stock price has gone up 10%. A few of the buyers are traders who know what they're doing. The rest are people being stuck.

You should view our reviews as a source of ideas and a supplement to your own research. Our purpose here is to inform, educate, and possibly entertain. If you think we're succeeding (or if you don't) please let us know. Thanks.