We believe earnings drive stock prices. Therefore, we focus on companies that we believe will exceed consensus earnings estimates. We buy companies we believe have:
- The ability to exceed consensus earnings estimates
- Stable to improving fundamentals
- Attractive valuations
Benchmark: Russell 1000 Value Index
The Advantage Equity team employs a disciplined, rules-based, linear process focused on identifying companies that can produce a positive earnings surprise. It begins with a multi-factor model based on stability of earnings, growth factors and value factors. Fundamental analysis then focuses on deriving proprietary earnings estimates, constructing a list of key merits and risks, and calculating high and low price targets, which are used to determine reward/risk ratios. Candidate stocks with the ability to exceed consensus earnings estimates that also exhibit greater upside price potential than downside price risk (reward/risk ratios above 1) are considered for further review. The stocks are then subject to extensive risk analysis within the context of the overall portfolio. Portfolio construction is implemented while adhering to sector and security level constraints. Ongoing monitoring and a strict sell discipline are important aspects of the overall investment process.
The multi-factor model is run daily, the portfolio and holdings are reviewed weekly during strategy sessions and stocks are re-evaluated as earnings are reported. If a security falls below our low price target and meets one of these three criteria, it will be reviewed with an intention to sell: security scores in the bottom quintile in the multi-factor model, analyst project earnings below consensus, or deterioration in near-term consensus earnings estimates into the bottom quintile of the universe based on percentage change. A security will also be reviewed if it exceeds our reasonable price target or the model identifies a better opportunity.