How Can Bottom-Up Investors Use Quantitative Tools for Idea Generation?

At Prospector, we are bottom-up, fundamental investors, but we leverage quantitative tools in a couple of ways.

At the front end of our investment process, we screen financial databases with specific criteria to help us identify interesting ideas upon which we can do more work. Free cash flow yield is a key screening metric. We routinely comb through the valuation sheets that analysts are constantly updating. We also use balance sheet and income statement screens to highlight the divergence of valuation from fundamentals.

Other types of screens we use include:

• Statutory data filing screens
• Growth screens to undercover outliers
• Geographic screens based on zip codes for regional risk

However, ideas come from a number of different ways. We’ve been following many of these companies for decades and have often met with the management of a prospective investment many times over the years. So, in some instances, we’re able to quickly identify a potential opportunity based on the knowledge we’ve collectively built through the years.

The other way we utilize tools and databases is during our detailed analysis and comparison: determining which companies are conservative and which are aggressive in their balance sheet estimations relative to our own estimates. However, we don’t routinely extend our reliance upon these databases by writing algorithms to replace our human judgment and compilation of conclusions derived from the data analysis. Ultimately, we are “old school” in our final analysis, discussions, and determinations.

Parts of this blog came from our recent Q&A with the Portfolio Managers. We encourage you to explore all 11 Q&As in the full document, available below. Topics include:

• Why portfolio managers should have their personal assets invested alongside shareholders
• Tips on avoiding Wall Street group think
• How our approach to equities is similar to high-quality bond managers