Investment Memo
Investment Memo
December 2, 2012
Having worked as a quant, I have a deep understanding of different quantitative strategies among several asset classes. In the equity world, quantitative strategies usually mean stock screens. While I believe in systematic investing, I also do recognize some pitfalls of algorithm-based stock screens. Thus, my investment goal is to develop a fusion strategy combining highly sophisticated quantitative and thorough fundamental portfolio management.
The first step of this fusion strategy is to select 20-50 high alpha stocks (out of 10,000 stocks in the global universe) based on a state-of-the-art stock screen. While a development of a multi-step quantitative equity strategy takes time, I would start with a stock screen based on well-known strategies that I have collected in the below table: Following some of the investment criteria of the preeminent investors (table above), I developed a screen that has selected the following stocks:
These stocks are relatively cheap, highly profitable, constantly growing and with very low debt. I would add further complexity and flexibility to the screen over time.
In the second step, I would analyze these high-alpha stocks in depth and select one company for the investment memo. This part involves the fundamental portfolio management techniques (analysis of sector, industry, company and the valuation of individual equity securities).
At this point in time, I would recommend buying Vale SA, a Brazilian mining leader. From the valuation perspective, the management of Vale is delivering new strategy (capital discipline, assets sale) that is not priced in according to several DCF models. On the other hand, the weaker iron ore outlook (European problems, slowdown in China) is priced in lower prices of Vale. What is more, the company trades at a discount to peers’ average valuation metrics and provides a healthy dividend yield of 6.28%.
Macroeconomists expect a higher steel demand in
December 2, 2012
Having worked as a quant, I have a deep understanding of different quantitative strategies among several asset classes. In the equity world, quantitative strategies usually mean stock screens. While I believe in systematic investing, I also do recognize some pitfalls of algorithm-based stock screens. Thus, my investment goal is to develop a fusion strategy combining highly sophisticated quantitative and thorough fundamental portfolio management.
The first step of this fusion strategy is to select 20-50 high alpha stocks (out of 10,000 stocks in the global universe) based on a state-of-the-art stock screen. While a development of a multi-step quantitative equity strategy takes time, I would start with a stock screen based on well-known strategies that I have collected in the below table: Following some of the investment criteria of the preeminent investors (table above), I developed a screen that has selected the following stocks:
These stocks are relatively cheap, highly profitable, constantly growing and with very low debt. I would add further complexity and flexibility to the screen over time.
In the second step, I would analyze these high-alpha stocks in depth and select one company for the investment memo. This part involves the fundamental portfolio management techniques (analysis of sector, industry, company and the valuation of individual equity securities).
At this point in time, I would recommend buying Vale SA, a Brazilian mining leader. From the valuation perspective, the management of Vale is delivering new strategy (capital discipline, assets sale) that is not priced in according to several DCF models. On the other hand, the weaker iron ore outlook (European problems, slowdown in China) is priced in lower prices of Vale. What is more, the company trades at a discount to peers’ average valuation metrics and provides a healthy dividend yield of 6.28%.
Macroeconomists expect a higher steel demand in