Fundamental Analysis

We use a combination of fundamental and technical analysis to determine which stocks to buy and when to buy and sell them.  Our proprietary fundamental screen analyzes dozens of charateristics for each stock in order to calculate a potential for appreciation.

We invest in individual securities for each client on a customized basis that best suits their investment goals and requirements. We do this by using a unique system, developed at this company, to track information about companies and their stock.

A stock on the current “buy” or “sell” list is not necessarily a candidate for purchase in every portfolio. Each buy/sell decision is made on an individual basis in each portfolio.

Considerations taken into account prior to a purchase:

Client’s investment goals, based on questionnaire and personal meetings, client’s need for, or aversion to taxable or tax-free dividend income, current asset mix or level of portfolio diversification, general market and economic conditions, statistical projections for each company’s stock.

Considerations taken into account prior to a sale include:

1. Tax consequences of the sale at a gain or loss.

• If the sale generates a long or short-term capital gain, does the client have any issues at a loss that should be sold to offset the gain?
• If the sale generates a capital loss,does the client have any highly appreciated issues that have become a larger-than-average percentage of the portfolio that should be sold to re-balance and better diversify the portfolio.

       2.  The total percentage of the market value of the portfolio the issue represents.

       3.  Whether or not statistics, fundamentals or other information indicate the stock should be sold, regardless.

Proprietary Appreciation Potential Calculation:

1. All data for current and potential holdings are kept in a single, master spreadsheet, which is backed up daily to the network server and the tape backup. The current master spreadsheet contains data on about 500 stocks.
2. A preliminary target price is calculated based on a minimum of eight distinct, current and historical P/E ratios and earnings estimates.
3. The calculated target price is then influenced by the sector or peer group’s average performance. If a stock historically outperforms the peer group, the appreciation potential will also exceed the group’s average, but it will be less than the pure earnings-based projection. Likewise, if a company tends to underperform its peer group, the appreciation potential will be shifted towards the group’s average, and will be slightly greater than the standalone earnings-based projection.
4. Once the target price is calculated and adjusted the stocks are sorted in descending order of appreciation potential.

Selection Process:

The proprietary CFA selection process takes into account technical and fundamental stock characteristics and has both growth and value components.

1. Any stock with less than 25% potential is removed from the list.
2. Any stock having an average analyst target price below the current price is removed.
3. Any stock with a following of fewer than five outside analysts is subject to removal, depending on the advisor’s knowledge of the company.
4. Any stock below both its 50- and 200-day moving average price is removed.
5. Any stock for which the peer groups’ current average P/E ratio exceeds 75% of its 5-year high is removed.
6. Any stock with a calculated target P/E higher than 75% of the groups 5-year high is removed.
7. Any stock having current and 5-year-average long-term debt to capitalization considered unreasonable compared with its peer group is removed.
8. Any stock with a Relative Strength, as calculated by Standard & Poors of less than 20 is removed from the list.
9. Any stock with a Price/Sales ratio higher than 5 is subject to removal, depending on the advisor’s knowledge of the company and the Price/Sales ratios of other companies in the stock’s peer group.
10. Any stock for which any of the required data is temporarily or no longer available is removed. The list of remaining stocks is the current “buy” list. The most recent stock price is updated in real-time. Data such as: moving averages, and 52-week high and low prices, and dividends are updated before any purchases are made if they are more than one day out of date. Other data such as trailing-twelve-month earnings and past year’s earnings are updated when they change, usually immediately following a quarterly earnings report. Earnings data is always updated during the course of any portfolio review.

Stocks remaining on the list are candidates for purchase in client portfolios depending on each client’s need for dividend income and capital appreciation within the assessed risk tolerance. Stocks can also be sorted according to dividend yield, market capitalization, Beta, or any of dozens of collected or calculated characteristics.

Stock Portfolio Structure:

Stocks from the updated list are added to portfolios such that the initial position size is approximately 5% of the total asset class. Diversification among various industry sectors is key.

We actively manage your account by:

1. reviewing every stock and asset held in your account at least quarterly
2. sending memos to clients containing relevant information if necessary.

When do we sell a stock?

If a position in a single stock appreciates to point it exceeds 10% of the overall holdings, it is reviewed and considered for liquidation. If a stock falls below the purchase price in any client’s portfolio the decision to Sell, Hold, or Cost Average Down is made based on the following:

1. Check all readily available sources for explanation
2. Confer with other Investment Professionals in and out of office
3. Call Company
4. Call Institutional Brokers
5. Revisit and/or re-calculate stock fundamentals
6. Confer with Client if applicable and possible. Decision to sell is ultimately the investment manager’s unless directed by client

Where do we find new stocks to analyze?

1. Frequent market “screens” for new stocks that would survive the selection process.
2. Newspapers/Media
3. Institutional Broker’s Research
4. Market Newsletters
5. Clients
6. Other Investment Professionals
7. Independent Research Companies
8. Professional Network

UNDER NO CIRCUMSTANCES do we buy or sell ANY STOCK based on outside recommendations without internal verification.

Transfers In—Managing a portfolio started at another company

For a variety of reasons, we are often asked to take over management of existing stock portfolios. We judiciously align the current assets with our own managed stocks. If a new stock passes the selection screening process, it is added to the master spreadsheet and the position is adjusted to or near 5% of the assets. If it does not, it is scheduled for complete or partial liquidation depending on tax consequences and gain/loss considerations.