How We Generate an Edge
Growth & Returns
We start with the numbers. The numbers we care about most include rate of growth and return on capital. We’re looking for quality businesses that can continue to deploy capital into growing their businesses. These are very high-level and long-term considerations.
Performance vs. Expectations
Next we continue with a shorter-term analysis. Using our capital return work and especially identification of return on incremental invested capital (ROIIC), we evaluate consensus forecasts. We identify structural changes in a business (and their causes) that may not be reflected in analyst estimates. We quantify expected variance to the Street’s outlook.
Incorporate New Information
Lastly we monitor changes in the environment, comments from management and competitors, capital markets activity and other factors that might influence results or make earnings revisions irrelevant.
Our investment advice is a function of this process. It starts with quality and growth, and is based on expected earnings revisions, and finally filtered by our best efforts to monitor current trends and non-fundamental factors.
Our edge is in identifying and quantifying expected revisions to consensus forecasts. This is where we spend most of our time. We are less concerned with calculating intrinsic valuation for equities. Instead, we look for inflection points in fundamentals and revisions that can drive valuation changes.
Strong Track Record
No process can yield a 100% hit rate. However, our approach is proprietary and has a strong track record of identifying earnings revisions before they are priced into a stock. Please contact us for the performance of recent stock calls.