The Small Cap Core seeks to outperform the Small Cap Universe over a full market cycle by 1.00% per year. The strategy primarily invests in companies with a market capitalization between $100 million and $4 billion. The portfolio is well diversified and is typically comprised of 60-110 small- cap stocks.
We strongly believe positive earnings estimates lead to increases in stock prices over time. Our research shows that changes to analyst’s earnings estimates catalyze equity price movements. Additionally, we have found that Wall Street analysts tend to “anchor” their estimates to the consensus rather than be an outlier. Given this bias, when positive changes emerge at a company, analysts tend to react by raising their earnings estimates. We believe the key to generating alpha is to identify those earnings revisions that are secular rather than one-time events. We employ in-depth fundamental analysis to understand how revisions in earnings estimates drive equity price movements, which, in turn, produces attractive long-term performance.
We employ a consistent and repeatable investment discipline focused on the analysis of earnings estimate revisions, balance sheets, and cash flow dynamics.
When we identify a company that meets our investment criteria, we perform detailed independent and sometimes contrarian bottom-up research analysis. Our “holistic” security analysis includes an in-depth financial statement review, which is an integral part of the research process. We intimately understand the cause and effect relationship between the different statements and recognize the importance of analyzing financial statement footnotes. This attention to detail can uncover areas where issues are likely to occur and enables us to focus on analyzing the impact they can have on future profitability. Forensic accounting techniques are also used to conduct a “deep-dive” into a company when a unique development is identified.
We perform weekly portfolio reviews to help identify unintended risks, negative changes in company financials and evaluate current changes in earnings revisions as well as financial ratios to ensure the initial purchase thesis remains intact.