WIKI_PROJECT

STOCK SELECTION

JONATHAN D. CALLAHAN, CFA
Core Equity Investment Process

#1. Fundamental Screening

• Valuation – Forward P/E, P/E vs. Peers, P/E vs. 5yr, Price/CF

• Profitability – ROIC, ROIC Trend, ROE vs. Peers

• Growth – Expected, Historic, Growth vs. Peers

#2. Earnings Quality Screening

• Defensive EPS – Free Cash Flow vs. GAAP

• Enterprising – EVA vs. GAAP

• Asset Turnover Trend

#3. Technical Screening

• Price Momentum

• Revision Trends

3000 Stocks

(1Bill+)

500 Stocks

100 Stocks

15-20 Stocks

Standard

DCF Tool

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• Highest ranked stocks run through proprietary industry screens

• Stocks that exhibit favorable traits within industry, selected for due diligence process

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Under

Review

Proprietary Screening Process

#1. Fundamental Screening

• Screen for strong fundamentals (Valuation(40%), Profitability(35%), Growth(25%))
• 40 year back-testing study conducted by Bernstein reveals a strong correlation between out-performance and security valuation, efficiency of capital use, as well as growth and revision trends. By a large degree, valuation has had the most explanatory power

#2. Earnings Quality Screening

• Defensive Earnings - Accruals – Free Cash Flow trends relative to GAAP (50%)
• Enterprising Earnings – Asset Efficiency & EVA Trends (40%)
• Earnings Purity – Variance between pro-forma and reported earnings (10%)
• Back-tested model of top quadrant “earnings quality” stocks has outperformed the market in 29 of the last 30 years, and by an average of 8%

#3. Momentum Screening

• Earnings Momentum & Recent revision trends (50%)
• Price Momentum – Relative Strength – 52 Week Hi-Lo (50%)

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#4. Industry Specific Screening

• Back-testing to identify industry specific variables
• Proprietary screens across multiple sectors including insurance, banks, energy, tech, semiconductor, health device, pharma, etc.

3000 Stocks

500 Stocks

100 Stocks

15 Stocks

Screening Process

• Performed weekly on Russell 3000 Universe
• Based primarily on fundamental and earnings quality rankings
• Secondary technical & industry specific filters also utilized

Evaluation Process

• Due Diligence – 10K, 10-Q review, industry analysis
• Competitive Analysis – Porter’s 5 forces
• Qualitative – Discussions with management, suppliers, customers, competitors, etc.
• Presented to investment committee for review

Maintenance Research

• News-flow, quarterly earnings conference calls, valuation and modeling updates
• Thesis review, revise buy/sell targets

Threat of New Entrants

• What are the barriers to entry in the business – is there a “moat”
• Scale, high switching costs, network effect, patents & technology are examples

Bargaining Power of Suppliers

• Does the company have a diverse base of suppliers that it relies on?
• Higher input costs, deteriorating working capital may signal weakness

Threat of Substitutes

• Are there substitutes for the product or service
• Are there rapidly emerging technologies that may change the competitive landscape

Existing Rivalry

• Is the industry commoditized or is pricing relatively healthy within the industry?
• Do companies compete on price, quality, or level of service?
• Net Margins, ROE

Bargaining Power of Customers

• Is the company able to pass on price increases to its customers?
• Net margins, ROE

Attractive Competitive Position