|
Disciplined Stock Management
Historically, stocks have provided higher long-term returns than bonds. However, due to their relatively high short-term volatility, portfolios holding only stocks may not be appropriate for all clients. Stocks are an important element of nearly all client portfolios, but will be apportioned depending on each client's time horizons, tolerance for volatility, and need for assured cash flow.
Exposure to stocks may be through holding individual stocks, stock mutual funds, or both. Our individual stock management process is based on a proprietary, quantitative analysis of fundamental characteristics to identify potential buys and issues to be sold.
 Buy Discipline
The buy discipline is composed of a number of different screens through which all stocks must pass to be considered for purchase. Our universe is composed of common stocks listed on the New York Stock Exchange, the NASDQ, and the American Stock Exchange. We analyze over three thousand common stocks each week. Following are the screens we use:
-
Quantitative Screen - QED (Quantitative Earnings Digest), a proprietary screen to rank the relative attractiveness of stocks based on an objective analysis of each stock's relative price/earnings ratio as a function of its relative earnings growth rate. Waycross has employed this dynamic screen for more than two decades.
-
Credibility Screen - verifies stocks appearing attractive based on the QED screen are not unattractive based on other independent analyses.
-
Growth Screen - eliminates from consideration stocks that are expected to have declining earnings.
-
Traditional Screen - assures that stocks also meet traditional criteria such as liquidity prior to being considered for purchase.
Sell Discipline
A successful management process requires a buy discipline that identifies securities that perform well relative to the market. However, a sell discipline is equally important to long-term success. Unlike the buy discipline screens, any one of our sell criteria may result in a position being sold. Every stock held in client portfolios is reviewed against all buy and sell criteria each week. The sell criteria are:
-
Overvaluation - A stock typically becomes overvalued because its price has risen significantly faster over time than its earnings, or there has been a decline in earnings.
-
Adverse Change - Change in a company or industry such as a significant legal suit, or negative government action.
-
Overweighting - Occurs when a stock has gained significantly more than other stocks in a portfolio and has the potential of having too large a negative impact on the portfolio. This condition may result in a partial sell in order to lock in profits and reduce the vulnerability of the portfolio.
-
Underperformance - If a stock significantly underperforms the market, it will be sold. This limits the losses that may be sustained.
Portfolio Policies
Our management policies are intended to limit risk by assuring diversification. We limit exposure to any single stock, economic sector, and capitalization profile. This prevents overweighting of individual stocks or sectors that may temporarily be the focus of short-term speculation or negative revaluation by the market. Many insitutional clients impose additional policies we abide by.
Caveat
While we firmly believe that a disciplined management process is a precondition for superior long-term performance, future performance cannot be guaranteed.
[printer friendly page]
|
