The first step in our investment process is to apply a series of internally developed and proprietary quantitative models to our investment universes. 361 Capital’s quantitative model—which includes several sub-models that anticipate security analyst behavior, predict earnings surprises, and assess valuation—ranks all stocks in an investible universe on a daily basis. These rankings correspond to the greater or lesser likelihood of a particular company announcing a positive earnings surprise or receiving a positive analyst revision—events which are often associated with excess stock returns.
Over the years we have conducted extensive research that validates the quantitative model’s ability to predict earnings surprises and estimate revisions. We are less sure that quantitative calculations are able to discern subtle operating and financial differences between otherwise attractive companies. This is important in that we construct concentrated portfolios of 30-35 securities and we seek only the most attractive stocks for our portfolios. As a result, we supplement our process with focused fundamental analysis.