Alhambra’s Fortalice equity strategy uses an earnings revision model as the foundation for stock selection. Central to this style is a belief that positive earnings surprises generate positive price movements, while negative earnings surprises generate negative price movements.
We combine fundamental research analysis with a quantitative, earnings momentum-based overlay to create highly diversified equity portfolios that can stand alone or be a fortifying allocation in your balanced investment account. The strategy, as the name implies, emphasizes strong (from the Latin, fortis) companies with positive earnings momentum and sound fundamentals.
A proprietary multi-factor process is employed utilizing a quantitative screen to generate a pool of potential purchase candidates. The model identifies and ranks companies according to the Fortalice criteria from a universe of approximately 6,600:
- Market Capitalization over $1.5 billion
- Satisfactory Analyst coverage to form a consensus
- Positive Earnings
- Positive Free Cash Flow
- Targeted Present Value Ranking
- Targeted Earnings Revision Ranking
On a weekly basis, the by-product of the quant screen is reviewed and fundamental investment research is performed for new names of interest. We look at various aspects of a company’s financial condition and business prospects:
- Income Statement
- Balance Sheet
- Cash Flows
- Sources of Growth
- Competitive Position
- Profit Margins
- Pricing Power
The result of these two steps is a pool of stocks with real business momentum, reasonable valuation, and a blend of appealing fundamental qualities. This purchase list spans all economic sectors, and a large number of industries within these sectors.
- Apply any client-specific restrictions to define stocks eligible for purchase in a particular portfolio.
- Start from a sector-neutral posture with minor adjustments based on model outputs.
- Create a diversified portfolio of 40 – 60 stocks with broad economic sector representation and target stock selection as primary means of generating positive risk-adjusted returns.
- Continuously monitor portfolio statistics vs. appropriate benchmark.
We employ a blend of model signals, fundamentals, technical factors and valuation. Two or more factors turning negative create a sell signal. Of these, valuation alone is the least important. We believe in letting winners run; however, as weightings in a particular issue increase due to price appreciation, they are typically trimmed.
- Loss of earnings momentum
- Concern over company fundamentals
- Deteriorating stock price performance
- Excess valuation
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