What This Strategy Aims to Do
This model aims to serve aggressive investors interested in high-quality small-cap and mid-cap growth and value stocks with potential for outsize returns.
Why It’s Worth Considering
The S&P 1500 consists of high-quality stocks; this strategy tries to choose the real hidden gems among them—companies of high quality, strong growth potential, and terrific value.
How We Do It
We work with a multi-factor ranking system.
Most of the factors deal with the company’s quality. How stable are its sales? How wide are its margins? How low are its accruals? How much cash and other liquid assets does it have on hand? How rich is its free cash flow? How well is it reducing its debt?
We look at the company’s value from a lot of different angles. Most important is its price to forward earnings, but we also look at price to sales, enterprise value to gross profit, enterprise value to unlevered free cash flow, price to free cash flow, and price to tangible book value to get a balanced picture.
In terms of growth, we’re looking at companies with high quarterly earnings and operating income growth, moderate but steady and accelerating sales growth, and high free-cash-flow growth.
Lastly, we also consider some sentiment indicators such as short interest, estimate revisions, earnings surprises, and share turnover.
There’s one thing that this model does not take into account at all, and that’s a stock’s price history. The price of a stock you buy should be low, but not necessarily compared to what it was before. We believe that a stock’s price history should have little influence upon buying and selling decisions.
Is It Suitable For You?
This model is only suitable for investors who are comfortable with trading weekly. Due to very heavy trading activity, it is suitable only to those who enjoy low-cost trading arrangements.