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