SCP has developed disciplined investment processes that rely on quantitative analysis to help identify what we believe are the most attractive opportunities. The firm believes that unique characteristics of domestic small cap and micro cap equities promotes the use of a quantitatively driven investment process.
Quantitative Investment Process
Superfactors + Flags = Total Points Algorithm
Click the steps below for more information.
Superfactors
Consistent Superfactor Exposure
SCP utilizes a report providing a ranked list of companies within each sector that provides a consistent set of metrics of how companies score over time. These Superfactors help identify companies that we believe have cheap valuation, are high quality and have strong market reaction. The Superfactors are included in the Total Points algorithm.
Components of Superfactors used for the Total Points algorithm include, but are not limited to:
Valuation
- Free Cash Flow Yield (FCF/EV)
- Earnings Yield (E/P)
- Book to Market (B/P)
- Sales Yield (S/P)
Quality
- Economic Returns (ROE, ROA)
- Balance Sheet Strength
- Earnings Quality & Consistency
- Capital Allocation History
Market Reaction
- Estimate Revisions
- Relative Strength
- Stock Price Trend
Flags
Avoid Unfavorable Characteristics and Reward Favorable Characteristics
Our quantitative investment process additionally evaluates each company’s strengths, liquidity, and weaknesses.
Risk Flags
- Unsustainable Earnings
- Unsustainable Cash Flows
- Insider Selling on Price Weakness
- Issuer of Equity
- Issuer of Debt
- “Transformational” M&A
- Bankruptcy Risk
- Short Selling Activity
Liquidity Flags
- Median Daily Dollar Volume
- Bid-Ask Spread
- Shareholder Composition
- Free Float Percentage
- ETF Ownership
- Index Membership
- Option Availability
Positive Flags
- Insider Buying
- Insider Ownership
- Compounder of Capital
- Accretive Share Buybacks
- Growing Dividends
- Business Improvement YOY
Total Points Algorithm
Determines Portfolio Construction
SCP’s disciplined process relies on quantitative analysis to help identify the most attractive opportunities. All approximately 2,500 stocks are scored based on our Total Points algorithm which determines portfolio construction.
General Guidelines for Portfolio Construction
- Build concentrated positions in companies, industries, and sectors that are quantitatively attractive
- Invest with the preference for a long-term time horizon
- Understand transaction costs and aim to minimize them
- We do not constrain the portfolio to any systematic risk factors