RESEARCH PROCESS

Fundamental Analysis:

The first operation in the fundamental research we perform is a purely quantitative screen, which is conducted using software that is capable of screening several broad lists of potential equities. This step includes screening for parameters such as cashflow, debt as a percentage of total capital, earnings growth rates for various time-periods, revenue growth rates for various time-periods, market share, cash per share, price earnings ratios, PEG ratios, enterprise value, price to book value ratios, etc. These screens are performed on various groups of equities representing large, medium, and small capitalization companies, to generate an initial list of potential candidates. This list is updated regularly and cross-rerferenced against existing portfolio holdings to verify that fundamentals for existing positions are maintaining acceptable levels.

From this initial list, we then perform qualitative research, which entails our personal effort to identify the very best companies based on factors such as quality of management, quality of product or service offerings, quality of business strategy, success in implementation of business strategy over time, longevity and effectiveness of the management team, position of market dominance within the company’s respective industry, future prospects for new products and services developed through research and development efforts, possibilities for acquisitions that will increase the likelihood of success within guidelines of business strategy as stated by management, etc. In addition, we have access to the full range of fundamental research tools and resources available through Fidelity Investments.

Once all quantitative and qualitative screens have been completed for all lists of potential investment candidates, qualified candidates are placed into groupings for further analysis. These groupings include separate lists for market capitalization and sectors of the economy. The fundamental research process is conducted on an ongoing basis, with quantitative screens performed weekly.

After all of these operations have been completed, we are left with an initial “Buy List” of companies that we consider to be “good companies”. ( A “good company” is not necessarily a good investment, so additional analysis is necessary before candidates are chosen for addition to portfolios. Fundamental research provides a list of which companies one should buy, while technical analysis tells us when to buy those companies.)

Technical Analysis:

Extensive technical analysis is performed on the companies contained in the “Buy List”, with an emphasis on factors such as moving average crossovers, persistence of money flow, resistance and support level penetration, trend analysis, etc. Only companies that survive all screens are considered for addition to client portfolios. Once all companies have been screened, the selected equities represent the Allen Wealth Management (AWM) Buy List. The research process just described is conducted on an ongoing basis, and companies are added to, or removed from, the AWM Buy List as their characteristics dictate.

Technical analysis is also used to identify exit points for equities held in portfolios. While there may be fundamental reasons for selling securities, often technical indicators provide an earlier indication of weakness (before fundamental data is available). Therefore, technical analysis is often a more effective tool for identifying exit points.

The combination of fundamental analysis – for identifying attractive candidates; and technical analysis – for the timing of purchases and sales; must be applied in the context of a “sector rotational strategy”. In our experience, a sector rotational strategy is the best approach to use during sideways market conditions. This strategy involves identifying attractive fundamental candidates within each sector of the economy, and then using fundamental and technical analysis to find opportunities within a sector that represent good companies, at attractive valuations, that also look attractive from a technical standpoint. As valuations in some sectors increase to unsustainable levels, opportunities in other sectors must be identified so that positions in the overvalued sector can be reduced or eliminated in favor of other positions in the undervalued sector, and so that short positions may then be established. Money is rotated from the expensive sector to the inexpensive sector, and hence the name “sector rotational strategy”. Likewise, short positions are rotated from previously overvalued sectors that have fallen in terms of valuation, to those sectors that are overvalued.

Ultimately the portfolio manager must make the final decision as to which equities from the AWM Buy List are selected for purchase for each client portfolio. Each company is evaluated based on its unique characteristics, and how its addition to a given portfolio will impact the overall structure of that portfolio. Only if a company on the AWM Buy List appears to improve the efficiency and profit potential for a portfolio, will it be purchased or sold short for that portfolio.

The previous description gives a general overview of our research and stock evaluation process. However, since each client has distinct investment objectives, risk tolerances, attitudes, needs, etc, each portfolio is customized to attempt to meet each client’s needs and expectations as closely as possible. Therefore, each portfolio will be unique, and its performance over time will depend on this unique character.

The measurement of the success of our investment process is how closely we fit each portfolio to the specific needs and expectations of the respective client.