Combining Fundamental Analysis with Technical Factors to Determine Timing in Purchasing and Sales of Stocks

Clay Sefter began CICC’s 47^th annual client conference by explaining the firm’s investment philosophy and stock selection process. Chase has always been a “bottom up” stock manager and lets its screening process determine the stocks to buy and sectors to overweight or underweight. This compares to a “top down” manager who selects stocks based on what he believes are likely market themes.  For example, Mr. Sefter added, “Because of Joe Biden’s election victory we won’t automatically readjust our portfolios, but rather, we’ll wait until ‘Biden’ stocks show up on our screening process.”

With every stock, Chase emphasizes three major fundamental factors:  quality, growth, and valuation.  “Chase” companies have consistent past earnings growth and should be likely to grow in the future as well.  We like to see five-years of historical earnings growth of 10% or more. And we like to see that earnings have grown in five of the past seven, or seven of the past 10 years. Lastly, we emphasize companies selling for reasonable price to earnings multiples, and are not overvalued compared to their historical ranges.

Our idea generation and screening process combines fundamental analysis with technical factors which help in timing purchases and sales. Technical analysis uses factors like relative strength, momentum and institutional buying and selling to rank stocks compared to the market.  This fundamental and technical screen is run weekly for stocks that are over $1 billion in market cap and narrows the universe of about 5,000 stocks to those with the best fundamental and technical strength.

This screen helps identify the “best of the best” – stocks acting well on both a fundamental and a technical basis. We then can analyze individual names.  We ask ourselves questions like “What is going well with this company, and how are they prepared to deal with changes in the future”, as well as technical questions like “Does the chart seem to indicate that this is a good buy point for the stock?”

Our portfolios typically have 30-50 holdings, with the smallest position about 1% and the largest 6% to 8%.  Our mid-cap portfolio holds companies of $1-$20 billion in size while our large-cap portfolio holds companies of $5 billion and larger. If a stock is added to a portfolio, it is monitored weekly. We may add to a stock if it does well, but if we see a stock weaken, we will examine what is behind it.   This brings us to our sell discipline.

There are several reasons why we sell a stock.  First, it may become fully valued; second, if we see fundamental or technical deterioration like falling earnings estimates or a new competitor that poses a threat to the company.  If the stock is not acting well technically, we may trim or sell it. And lastly, we might sell a stock is if we find something more attractive. The weaker stocks in our portfolios are always subject to being sold if we find something that we like better.

Click play below to see Clay’s entire presentation.