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For more than a decade, William A. Trent, CFA worked for large institutional investment managers, helping manage as much as $80 billion. His focus on risk management and long-term fundamental prospects aims to provide superior long-term returns, with less risk than the overall market.
Now you can have access to his investment ideas and reports. Sign up now to get the first 30 days free. By registering, you agree to abide by the Stock Market Beat Subscription Agreement, Terms of Use and Disclaimer.
$19.99 per month (first 30 days free)
$149.99 per year (first 30 days free)
The Stock Market Beat Process
Successful investments require hard work. It takes hours to properly review a set of financial statements and years to fully understand the dynamics of industry and economic trends. By following a five-step process, Stock Market Beat is able to cut through the clutter to find the stocks that are worth the effort.
Step 1: Screening
There are more than 8,000 publicly traded companies listed on
Step 2: Quantitative Modeling
To further narrow the list of opportunities to only those that are most attractive, five separate quantitative models are run.
- Earnings momentum – In the long term, the price of a stock is directly related to its earnings power. The higher the earnings, and the faster they are rising, the more valuable the stock. This model identifies companies with rising earnings and rising earnings estimates.
- Earnings quality – As the Worldcom, Enron and other scandals have shown, company managers often have an incentive to boost short term reported earnings even at the expense of long-term prospects. The earnings quality model measures the difference between reported “accounting” earnings and the actual cash transactions taking place. The smaller the difference, the higher the quality of reported earnings.
- Price momentum – Investors have long known that “the trend is your friend,” and even research by academics who believe in efficient markets has shown that the stocks that have risen the most over the last year tend, on average, to generate higher returns than those that have not.
- Free cash flow – The value of any investment is the future cash flows it will generate, discounted back to the present value at a rate that compensates the investor for the amount of risk taken. Stocks with high free cash flow relative to their market value are already providing such returns. Stocks with rapidly growing free cash flow are likely to do so in the future.
- Return potential – Knowing that a company has high earnings momentum, or high free cash flow, is not sufficient to tell an investor how much the stock will rise. If a company is growing rapidly but is already overvalued, the price could decline anyway. Likewise, companies that offer limited growth can be priced so cheaply that their future returns can be spectacular. By focusing on growth, profitability and valuation, the return potential model estimates a potential return for each company and ranks all the companies by their potential return.
Stocks that score well (top 25%) on multiple quantitative models are likely to be more attractive investment candidates. It is rare to find stocks that score in the top quartile on all five models – but it happens! Those are the opportunities that really attract Stock Market Beat’s attention.
Step 3: Fundamental Analysis
Quantitative models have a major flaw – GIGO. Garbage in, garbage out. From Long Term Capital Management to the quant fund blowups of 2007, relying solely on the data-driven quantitative models has been shown to be a risky venture.
For Stock Market Beat, the quantitative models are merely a starting point – a way of identifying a few stocks that appear to be best positioned. Then the hours of rigorous fundamental analysis can begin.
How does the economic outlook affect a company? How is the company positioned in its industry? What is the company’s strategy, and how will the future financial results differ from the current? Are there significant legal or regulatory issues that could affect the company? Does management treat investors fairly? These are concerns that cannot be effectively plugged into quantitative models, but which nonetheless affect a company’s value.
Stock Market Beat asks these questions, and uses the answers to develop estimates of a stock’s true value. Over the long term, stocks trading well below their true value are likely to perform well.
Step 4: Technical Analysis
Warren Buffet’s mentor Benjamin Graham once said “In the short run, the market is a voting machine, but in the long run it is a weighing machine.” Stocks can be popular or unpopular in the short term regardless of whether this sentiment is justified by the fundamentals. In the long term, however, stocks tend to reflect the true value. The problem, as John Maynard Keynes so eloquently put it, is that “in the long run, we’re all dead.”
Countless value oriented investors have given up after waiting years for the stocks they have identified as undervalued to finally earn the market’s respect. Cheap stocks often stay cheap, becoming “value traps.”
Adding technical analysis to the process enables Stock Market Beat to identify not only the true value of the stock, but to identify the point at which investors start to vote for (or against) it. When the best values also have the wind at their backs, the performance can really start to improve.
Step 5: Risk Management
A key element of the Stock Market Beat process is to overlay a stock investment strategy with risk management by writing options that allow other investors to buy from or sell to us, if it benefits them, at a predetermined price.
Since having these options protects other investors from large changes in the value of their stocks, they are willing to pay an insurance premium for that protection. If the stock doesn’t have a large move, the option writer gets to keep the premium. The premiums collected help lower the cost or increase the realized sale value of the underlying stock – helping the investor to buy low and sell high.
Warren Buffett has written billions of dollars worth of put options on major stock indexes. If there’s any signal that the strategy offers high risk-adjusted returns, that is it.
Stock Market Beat continually evaluates the investment universe using this five step process, and publishes the results for premium subscribers. With the first 30 days free, why not check it out and see if the process can work for you? By registering, you agree to abide by the Stock Market Beat Subscription Agreement, Terms of Use and Disclaimer.
$19.99 per month (first 30 days free)
$149.99 per year (first 30 days free)
