Steve Romick is out with his quarterly commentary for the FPA Crescent fund. The famed value investor discusses his top stocks, the economy, rates and more. Steve Romick has an interesting section on market valuations below is the segment followed by the full document in scribd.

Steven Romick

Steve Romick

An upward sloping chart is not the optimal environment for us to deploy capital, particularly when equities aren’t cheap, except in relation to bonds. Although bearish on bonds, we are neither bullish nor bearish on stocks but reflectively cautious.

We continue to research our companies in the same disciplined fashion. When companies become attractive in our conservative base case earnings scenarios, we will make an investment even against what might be an ugly macro-economic backdrop. We believe a good business at a great price always demands the commitment of capital and invariably trumps whatever larger fears may be impacting that company, its industry or the general economy.

We begin our process by looking for those good companies that are operating below their potential, or ones for which there are concerns that the good times won’t last. There may be valid reasons that justify why a company is out of favor, but we work to establish that it is either ephemeral or already accounted for in the price.

The vast majority of the time we strive to gain a deep, holistic understanding of a business. Occasionally, however, an investment might resemble more of a statistical businessman’s wager. By deep understanding, we mean that in addition to studying the financial statements and footnotes, we also try to understand the capabilities of the management team, which can admittedly be more touchy-feely. A by-product of this work is our earnings and cash flow models, which we use to frame risk and reward.

We do not try and determine what a company can earn in a particular quarter or year because we appreciate the limitations of our work. Wall Street thinks differently and offers tremendous precision as to what a company may earn each quarter. Unfortunately, that’s a fool’s errand. As you can see in the chart below, in the vast majority of years, the optimism of Wall Street analysts’ gets the better of them, with earnings estimates typically being consistently reduced from the beginning of the year through the four seasons.

2013 q2 Crescent Commentary Steve Romick