A: Over time, we have tested that the perfect timing for the smoothing that we do is four weeks. We look at the latest week‘s data as the most important, but we average results over the past four weeks. A company may undergo a price decline of 15% or 25% that will still, when you smooth it out, have an Alpha Score over 60.

Many times, you will get a spike that will involve futures activity or options expiration. It might involve a huge trade in one of the Exchange Traded Funds that filters down into the individual companies. However, over time, in the ETFs that we manage we can change up to three stocks a week.

We are not trying to sell out at the top and buy at the bottom. In fact, we are trying to buy companies as they come up with the Alpha going from 50 above 60 or as high as above 80. In addition, we are looking for companies that have tremendous earnings where the valuation is reasonable. As long as the candidates meet those criteria, you can see how we create the master list every week as we literally sort out the companies at the top of the ranking.

Q: What do you do to avoid liquidity traps?

A: Since the average market cap in our portfolios is fairly high, the average daily volume for 50 stocks that we select runs about four million shares a day, presenting us with a lot of liquidity. The risk of an individual company shows up originally in the money flow. We will start to see the money flow, the Alpha score will start to peak out and then decline and it reaches a certain level when it raises a yellow light. Once the NOW rank that we produce, which is a combination of the Alpha Score and five variables that I highlighted earlier, drops below 60 it is a candidate for a replacement.

Q: How do you improve your model with newly acquired knowledge in order to make your system more refined and sensitive to the signals that you get as you go along?

A: About five years ago, we were doing more work with the smoothing techniques because there was an expansion on the use of ETFs by the proprietary traders. There was more systematic risk in terms of companies and sectors. With the five financial groups that we have, instead of one or two of the financial groups going negative and the other ones being positive, we would have all five going negative. We did a little bit of shifting with the smoothing at the time and, in the last couple of years we have not made any changes at all. The question remains the same – where is the highest degree of confidence and where can we get the most earnings growth for the lowest PE?

We believe portfolio management is not really about trying to hit grand slams. It is exposing the portfolio to those companies that are growing in real terms with high profit margins in a way that cash comes down and ends up being part of shareholder value. The most amazing fact is the amount of human effort that goes into analyzing companies that are already in trouble, or are so big that they have no potential for growing.

Whenever a company reports earnings, I get a report that shows the number of analysts that are following the stock. Those followed by only a few analysts are the ones that have the most potential for producing Alpha because they are going from under-ownership and, at some point down the road, they may become over-owned. So, I consider that a positive. The less coverage they have now and the fact that they are not in an index or they are not a significant part of an index gives those stocks the potential for producing Alpha.