Q: Would you provide a brief overview of the company?

A: Profit Investment Management, LLC is a SEC registered investment advisory firm founded in April 1996 with approximately $2 billion under management. The firm offers a variety of investment management services and products for retail, institutional, and high net worth clients.

The Profit Large Cap Equity composite is our flagship product started on October 31, 1997 and the Profit Small Cap Equity product was launched on March 31, 2005.

Q: What are the main principles behind your investment philosophy?

A: Our investment philosophy is based on the premise that active fundamental stock selection can provide outperformance to an index of securities over time because business values differ from stock prices at various times over the course of a market cycle.

At the core of our process is the belief that mis-priced businesses can be found within the stock market at any point within the market cycle.

Q: How does your philosophy translate into the composite’s investment strategy?

A: The composite’s investment strategy combines elements of value and growth investing. Our strategy has evolved from a ‘value strategy with a growth overlay’ to a ‘valuation-sensitive growth strategy,’ which selects growth stocks deemed as mispriced relative to their peers and their own price history. The expectation of the strategy is that a catalyst will eventually incite investors to revaluate such stocks, thereby lifting the prices of these equities.

The product is designed to perform in all market environments over the course of the market cycle.

Q: What are the steps involved in your research process?

A: We want to own growth stocks that will benefit from investors’ revaluation of the relationship between the company’s fundamentals and the stock’s current market price. The companies that meet these criteria show rapid earnings expansion, trade at a discounted valuation to the market, and have a near-term catalyst to kick-start this revaluation.

The research process begins with our in-house proprietary screening model. It is a rigorous process that blends fundamentals-based quantitative analysis, focused qualitative reviews, risk-control guidelines and advanced technology to assess stocks and build portfolios.

First, we start by screening a universe of 9,500 securities of eligible companies. Next, we analyze these securities and come up with about 150 prospective companies by determining the company''s intrinsic value through discounted cash flows, historical market multiples and transaction multiples. The investment team then verifies the strength of the company''s financial statements by reading 10Ks, 10Qs and industry reports. We read current news to learn why the company''s stock is trading at a discount to our intrinsic value calculation.

Other characteristics that we consider attractive for a stock to be considered in our portfolio include a low price-to-earnings relative to a company’s history and/or its peer group, attractive return on equity, strong management team, low price to earnings growth ratio, consistent earnings growth rates and the value of the company should be trading at least 30% below our calculated intrinsic value.

The portfolio manager verifies whether the company''s competitive advantage is sustainable by assessing if the company is able to deliver the earnings projected, and if there is an identifiable catalyst to assist other investors in recognizing the stock’s value.

Finally, the stocks selected are then purchased and held until our price objective is attained or until our investment thesis is proven incorrect.

Q: Could you illustrate your research process with a few examples?

A: An example of a company that evolved from being a company in our small cap portfolio to a large cap company is Green Mountain Coffee Roasters, Inc. It is engaged in the specialty coffee and coffee maker businesses.

There were questions around the sustainability of their earnings and acquiring companies to leverage up their earnings growth. We were not sure if the company would sustain its earnings growth rate. But the company has played out very well in the large-cap space and the stock continued to accelerate. That is one example of a stock that fits our fundamentals and earnings growth rate, as well as a case of a security that has been mis-priced by the market and trading at a significant discount to its intrinsic value.

An example of a small-cap holding would be that of G-III Apparel Group, Ltd. The company designs, manufactures and markets a range of outerwear, sportswear and dresses, including coats, jackets, pants and women’s suits. The company sells its products under licensed brands, its own brands and private retail labels.