Step 1: Weekly Screening

The process begins with a weekly quantitative screen using the Zacks database to identify companies with earnings momentum.

Characteristics include:

• Positive current and next fiscal year estimates
• Positive earnings surprises
• Raised earnings estimates by at least one percent
• Liquidity minimums

Earnings momentum is verified using First Call data. Stocks that do not have earnings momentum on both databases are eliminated.

Step 2: Earnings Acceleration

Identify companies experiencing accelerating earnings growth. We analyze quarterly, yearly, and estimated five year earnings growth to identify companies with an average of ten percent growth in their earnings. Earnings momentum stocks that do not meet the minimum earnings growth are eliminated.

Step 3: ROE Verification

Identify companies with improving return on equity. ROE is used to measure profitability. Companies not experiencing accelerating ROE are eliminated.

Step 4: Project a Target Price

Project a target price for the stock. Two valuation methods are used.

• An academic method calculating the sum of future earnings minus any
  long term debt
• Extensive technical analysis comparing current and historical trading data
  

Step 5: Price Momentum

Identify price momentum. A five year MACD (Moving Average Convergence/Diverge) and one year chart are compared. Stocks that are not in an uptrend are eliminated. Standard deviation charts are used in conjunction with the target price analysis, stocks are given upside and downside price breakpoints.

Step 6: Fundamental Research

Identify the fundamental reason for the stock’s earnings momentum and to monitor its potential. Using sources from Wall Street research and independent research sites, we gather various fundamental research to identify the catalysts for stock movement.

Step 7: Bullpen of Stocks

The first six steps of the process produce an average of three to ten new ideas for portfolio consideration. These qualifying stocks are placed into a bullpen. Bullpen stocks are monitored daily for technical entry opportunities. Current holdings are evaluated in the exact same manner and are evaluated in comparison to the new prospects. Stocks may be switched if a new idea presents a better investment opportunity

Bullpen Example:

• A.G. Ewards
• Helix Energy
• Lone Star Steel
• Alberto Culver

Step 8: Sell Process

Stocks are sold using the same analysis as the buy process. Red flags are raised and a sell is considered if:

• A company experiences negative earnings momentum
• Decelerating earnings growth
• Decelerating roe
• If the stock reaches its target price based on earnings evaluation
• If the stock violates its downside breakpoint.
• If a better idea is available to replace non-performing stocks