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Systematic Financial Management’s bottom-up process starts with a quantitative screen of companies with market capitalizations between $1 billion and $15 billion. These companies are then ranked by a combination of valuation factors and positive earnings surprise. This screening process generates a research focus list of 150 companies meriting rigorous fundamental analysis to confirm each stock’s value and catalyst for appreciation. The research process incorporates investor expectations, financial statement analysis, thorough company valuation analysis, and fundamental due diligence. This multi-faceted research process enables them to avoid stocks in the “value trap,” by focusing only on companies with confirmed fundamental improvement as evidenced by a genuine positive earnings surprise. Through an extensive cash flow analysis, they verify the sustainability of the earnings surprise (i.e., derived from consistent operations versus erratic favorable events).
Ideal Investment
The ideal company typically exhibits many of the following traits:
- Low forward P/E
- Improving margins
- Strong cash flow generation
- Strong business models and strong earnings generation
- Excellent potential for continued positive earnings surprises
Portfolio Construction
Portfolio management:
- Leverages stock ideas from their in depth research analysis
- Employs a bottom-up process based on individual security selection
Sell Discipline
The investment team will make a sell decision when:
- Price appreciation causes P/E expansion to fair value
- Price appreciation causes market capitalization of the company to reach $15 billion
- There are other investment opportunities that are more attractive on a relative valuation and expected return basis
- Analysis leads portfolio management to anticipate downward estimate revisions or a possible negative earnings surprise
- There is a reported negative earnings surprise
Investment Process Chart
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