ScanSource: An American Hero company

Author: Carter LeCraw, American Values Investments

Covestor model: American Heroes

Disclosure: No position in SCSC for Covestor model at time of writing

2011 was another year of high volatility.  In spite of the political rhetoric and doomsday predictions for the Eurozone, both of which continue, the US economy managed to plug along and domestic stock markets zoomed during the fourth quarter of 2011.

The American Hero Portfolios also finished the year well. Our Covestor model was up 4% for the year, outpacing the S&P500’s flat performance (before dividends).

One strategy to deal with volatility is to take a tactical approach.  Tactical approaches include trying to be in the market when it is going up and out when it is going down.  In order to be consistent with American Values Investments’ approach, it seems appropriate to stick with a more fundamental strategy.  A volatility metric (standard deviation) has been added to the regular stock analysis.

Historically, presidential election years have usually been good for stocks.  Perhaps all the extra funds for marketing the various candidates helps explain those results, an argument for the tactical approach of being in the market.

American Values Investments plans to exercise discipline and stay true to its strategy.  During the first quarter, individual stocks will continue to be monitored on a regular basis, the economic data will be analyzed for any sector concentration opportunities and models will be rebalanced to equal weight for each stock.  Equal weighting allows each Hero (stock) in the model to participate in performance, incorporates the sell high buy low strategy, and reduces overconcentration risk.  By using a concentrated portfolio, transaction costs are better controlled and it reinforces the philosophy of letting each Hero (stock) participate in the results.  The standard of using at least seven of the ten sectors ensures diversification.   Our rebalancing process will be done toward the end of the first quarter, perhaps running into the second quarter.  By that time, year-end earnings results will be factored into the individual stock rankings and any capital gains in taxable accounts would likely be long term.

American Hero Company: ScanSource

America is better off because of American Hero Companies like ScanSource (SCSC), a distributor of specialty technology products headquartered in Greenville, South Carolina. Mike Baur, the current CEO, began the company in 1992 with only six employees. Today it has over 1000 employees and annual revenues approaching 3 billion.

Its growth and success are impressive, but it’s the values of the company that allowed ScanSource to qualify as an American Hero Company. Scansource has stated core values that include “integrity, innovation, community service, and valuing differences.” Stating values is one thing, but living them out is another. Our research indicates that these stated values are not mere words.

From a customer standpoint, they have made a commitment to only partner with their dealers, but never compete. For this reason they refuse to sell directly to end users. This obviously helps to retain a high degree of loyalty from their dealers.

Employees are also valued greatly. Mike Baur maintains an “open door” policy for team members, and even leads a monthly video-conferenced staff meeting to solicit ideas and suggestions. In an article last April, Mr. Baur was quoted as saying, “For ScanSource, a happy, healthy employee is much more productive and will contribute more to our long-term success.” From our perspective, these appear to be sincere words from a genuinely concerned and involved CEO.

ScanSource is very conscious of the community and has even established a charitable foundation that makes contributions to “educational programs, area families, children, and other organizations in need”. The company matches contributions from employees to this generous foundation.

We salute the dedicated team at ScanSource. Owning stock in American Hero Companies is a great way investors can support companies like ScanSource which is, in turn, making valuable contributions to their customers, employees, communities and… America.