Our Discipline: Unique And Thorough

Emerald Capital Management designs portfolios intended to provide the highest possible returns. We consider our methods proprietary and naturally reveal only as much information as necessary for you to make a sound judgment as to its validity. Our sophisticated process of financial engineering is summarized as follows. 

Step One: Our research is produced monthly. We begin by collecting data for over 40 fundamental criteria on more than 10,000 domestic stocks. We are not interested in low dollar or low volume stocks. Those issues trading below a specific price and/or volume threshold are removed. This leaves approximately 7,000 stocks.

From this universe we are able to determine the characteristics or "style" that is currently in favor on Wall Street. This is accomplished through extensive computer modeling where, in essence, we reverse engineer the stock market by breaking down each of the 7000 stocks into its various fundamental components. Not only are we able to reveal the favored characteristics, we also determine each characteristic’s degree of importance to Wall Street.

Having discovered which of the fundamental criteria are most in favor, we reconstruct each stock and assign it a Master Score. This score reflects how much impact each of the various criteria have had on the historical return of the stock. The Master Score also contains a forward looking component which tells us what potential impact the fundamentals can have on a stock's future return.

Step Two: Each stock is assigned an RvR, or Reward/Risk rank. This is determined by dividing Alpha over Standard Deviation. Alpha, in simple terms, is the amount of return a stock provides in excess of market return. Theoretically if the market is up 10% and a stock is up 15%, the difference of 5% is the stock's Alpha. Of course the actual computation is far more involved and results in a more statistically significant number.

The Standard Deviation is computed as a measurement of a stock's risk. This number reflects how far a stock's price typically deviates from its "normal" price. A stock with a high standard deviation will have wide price swings over time where a stock with low standard deviation will have day to day prices which stay fairly close to each other.

The goal is to select stocks which have very high Alpha and very low Standard Deviation, thereby providing maximum return while taking minimal risk. The RvR of each stock is computed and tracked historically. Those stocks with improving RvRs over time are of most interest to us.

Step Three: Here we first eliminate any stock which has a negative RvR. These are stocks having low return and high risk. The remaining stocks, usually about 3000, are put through a stringent screening process. We score each stock based on several earnings criteria including growth rates and earnings estimate performance. We also score on volume and market capitalization as it relates to this smaller universe. We refer to these as Minor Scores.

The stocks are then assigned a Composite Rank. This rank reflects a combination of Master Score, RvR and the various minor scores. We then take the top 150 stocks by Composite Rank and these become our SuperStocks Buy List. The SuperStocks as a group contain the fundamental characteristics currently sought after by Wall Street. These stocks provide the greatest amount of return with the least risk. They also contain the highest probability of future return potential.

Step Four: Multi-Factor Optimization is applied to the SuperStocks. We build a portfolio of 50 stocks taken from the SuperStock buy list. Our proprietary linear-programming computer model runs thousands of iterations and presents us with the best combination of 50 stocks which are allowed to advance to the final portfolio construction phase.

Step Five: We now decide which stocks, if any, should be sold from the existing portfolio. We use a variety of criteria including how long a stock has been off the SuperStock list and whether or not the stock has exceeded acceptable risk levels. We are also concerned with a stock that has become over weighted in the portfolio due to a significant run up in price. Finally, we view a stagnate position as a cost of opportunity and therefore will sell a stock which does not meet our performance standards within a reasonable amount of time.

New additions to the portfolio are taken from the 50 stocks that have thus far survived our stringent process. At this time we again utilize our multi-factor optimization model and ask the questions: Which of the 50 stocks best combine with the existing portfolio? Which additions will move the portfolio to provide even higher return with lower risk? Which new positions will skew the portfolio closer to the style currently in favor?

Prior to being allowed into the final optimization process each stock must pass our thorough due diligence. We verify all data used in the selection of the stock as well as it's current and historical price and volume performance. We review for any news which may impact the success of the stock including management changes, mergers and acquisitions and earnings related information.

The final result is a portfolio of high performance securities, each appropriately weighted against the other to take only as much risk as necessary, to maximize the potential return, and to possess the combined characteristics Wall Street is buying right now.

Should you desire more detail regarding the construction of our portfolios we would be delighted to offer a private consultation.