Undiscovered opportunity in the large-cap core space can be found with science and art. Jeff Moser, COO and portfolio manager with Golden Capital Management, LLC, explains in this excerpt of the On the Trading DeskSM from Tuesday, May 19, 2015.
Listen to the full interview.
Your team focuses heavily on understanding earnings. Why?
The reason we put a lot of weight in earnings and earnings surprise at a good valuation is we believe that, in the long run, it drives the price of a stock.
Jeff, can you describe your process? I know it’s both quantitative and qualitative.
Our process is active quant, and just as you mentioned, it’s quantitative and qualitative—in that sequence. We describe it as the science and the art of investing. The first step is the quantitative process, the science, because when you’re managing large-cap core, the investment universe starts off fairly large: 1,200 companies. There’s no way to qualitatively review 1,200 companies. Our process is to objectively narrow that universe down to a small subset of companies that have just the right type of qualities—companies with a high probability of reporting a positive earnings surprise and good valuation or undervalued. Then comes the qualitative part, the art, where we look inside the company, at the management team, the products of the company, any new products, whether these new products are working or not, and if there needs to be an expansion of the sales team to take advantage of that. The qualitative things assess the investment merit, the fundamentals of the company, and the ability of that company to deliver on future earnings at a good valuation.
Are there undiscovered values yet to be found in large-cap core?
First off, when you think of undiscovered names, you think a stock that maybe no one’s heard about before. But it can be a stock that is very common yet has underperformed over a long time period. For example, a very large, big-box home-improvement store is a holding of ours. When we purchased it, it had been out of favor. It lost ground to its competitor, its profit margins suffered, and it was dealing with customer service complaints. But it began to address those issues. Our quantitative model selected the stock, and it rose to the top. I looked at that stock as a buy candidate. The metrics looked better. So you can look under the numbers and see if there’s something that’s causing a temporary blip in a particular company. Comparing a company’s fundamentals, investment merit, and earnings opportunities to the other 1,200 companies in our investment universe has been the best way for us to determine whether it is a buy, hold, or sell candidate.
Jeff, that’s all we have time for today. Thanks for joining us.
Thank you, Amy.