Stock Selection Approach by Courtney Smith and Company - Stock selection is an important part of stock market success.

the quantitative process for stock selection

~ The Quantitative Process ~

We constantly screen all the listed stocks in the US and the top NASDAQ stocks for certain quantitative criteria that will meet our high stock selection standards. These include:

P/E ratio of less than the market multiple and preferably single digits.
A P/E of at least 50% less than the expected earnings growth over the coming several years.
Earnings growth of at 15% and preferably 20% per year for the next several years.
An ROE of greater than 15% and preferable over 20% with using debt to boost up the return.

In addition, we use a similar concept to the "owner earnings" concept of Warren Buffet. We look at the current and expected cash flow and subtract and capital spending and increases in working capital and discount them to the present. We only buy stocks that have a valuation of at least 50% greater than their current market capitalization though we greatly prefer to buy companies with at least a 100% greater expected value than their current market cap.

We also want the stocks to be trading at the "cheap" end of their usual P/E in relation to themselves and to the market. In other words, suppose a company's P/E has been in a range of 10-20 over the last 10 years and has generally averaged at about the market's P/E. We would then prefer to buy the stock nearer to a P/E of 10 than to 20 and to buy the stock at less than the market multiple. We expect that the stocks P/E will return to its mean over time and give us an additional boost in stock performance.

This demanding stock selection screening reduces the universe of stocks down to just a few dozen. We then shift to a qualitative analytical mode to further reduce the number of stocks.

However, we are also looking out for special situations that don't necessarily follow the criteria above.

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the quantitative process for stock selection
   
the quantitative process for stock selection the quantitative process for stock selection

Courtney Smith & Co. is an investment management company
specializing in stock market timing and stock selection.
© 2002-3 Courtney Smith & Co., Inc.

Courtney Smith & Co.
Box 7603, New York,
NY 10150-7603
TEL: (917) 327-3536
FAX: (270) 626-6500

 

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