Equity Selection Process Overview

Legacy Capital, LLC has developed a proprietary equity selection process.  This strategy has also been used over the last five years in real world, real time, real money client portfolios. Unlike the traditional value or growth styles of investing, our approach is more of a momentum aggressive growth style. We are seeking to invest in companies with significant growth potential.

The typical value investor is looking for fundamentally sound companies that are selling on the cheap. GARP (growth at reasonable prices) investors are seeking investments at fair and reasonable prices. But even aggressive growth investors tend to shy away from stocks trading at or near 52 week highs or at all time highs. Legacy Capital's approach breaks from these traditions and at first glance may seem counter-intuitive. Our strategy often initiates positions after a stock has run up in value for months or even a year or more.

A prevailing fear of individual and professional investors alike is "what goes up must come down." Sooner or later this is always true. We all know that no matter how good an investment may be, the price of that stock can't go up forever. However, there are hundreds of examples of stocks trading at all time highs that have continued even higher for months or years longer.

There are different reasons why a stock may be trading at prices that at first glance may seem too high. Sometimes stocks prices of both good companies and bad are simply pulled higher by a rising bull market. But sometimes a stock might be trading at what might seem to be an unreasonably high price simply because that's where it should be trading with potential for further increases. These are precisely the stocks that our selection process tries to identify.

Goal & Strategy

The goal of Legacy Capital's proprietary equity selection strategy is capital appreciation through investments primarily in global growth equities. We seek to invest in transformative and innovative companies that are market leaders in their industry and are expected to experience a sustainable period of above average growth. In addition to the strong fundamental and technical dynamics of a company, we seek companies with a new product, a more efficient process or a fresh leadership team that helps to generate additional growth.

Portfolio Positioning

The composition of the portfolio is primarily mid-cap and large-cap growth companies with occasional exposure to small-cap growth companies.

Investment decisions are based on a combination of both fundamental and technical criteria. The strategy uses market momentum to determine whether to be in a bullish or defensive posture.

Our investment choices are not industry, sector or product specific nor are they influenced by geography or politics. We are simply striving to invest in companies that have the potential for aggressive growth.

Investments are often initiated when companies are experiencing new highs in stock values but purchases are seldom made when prices are near lows. Therefore from a traditional perspective, our strategy is not a value proposition and is often counter intuitive.

The portfolio is tactical in nature as opposed to strategic, striving for positive long-term performance through short-term gains.

Risk

The value and/or returns of a portfolio will fluctuate with market and economic conditions domestically and internationally and will also be influenced by geo-political events around the world. The strategy's investment in aggressive growth companies may lend itself to outperformance in rising markets and underperformance in declining markets. However, in an effort to hedge gains, our trading strategy will liquidate some or all of the equity positions into cash as market momentum dictates.

Selection Process

The foundation for the analytical process consists of 3 computer filters:

  • Filter consisting of 9 technical measures (daily volume, current price, latest quarter sales vs. same quarter previous year, etc.)
  • Filter consisting of 16 fundamental measures (several different measures of EPS, operating margin, profit margin, ROE, etc.)
  • Filter consisting of the 9 technical measures and the 16 fundamental measures
  1. Filter the equity universe for stocks meeting all 9 technical measures. This typically produces a list of about 50-75 individual stocks.
  2. Filter the equity universe for stocks meeting 16 fundamental measures. This typically produces a list of about 25-50 individual stocks.
  3. Enter all the stocks produced from the above 2 filters into the 3rd filter which scores each stock from 1-100 with 100 being the best. Stocks that score a specific number or better are included on a list of possible stocks for purchase. For instance, a score of 60 means that a stock meets 15 of the total 25 combined criteria. This typically results in a list of about 20-35 individual stocks.
  4. The 20-35 stocks generated in step 3 then become candidates for purchase when the market is in broad rally. This is the Basic List.
  5. An Enhanced List is created from the Basic List by including only those stocks on the Basic List that score above a certain number in step 3 above. This typically results in a list of about 8-12 individual stocks.
  6. A stock remains on each list until it falls below the score specified in step 3. Stocks might also be eliminated from a list if the general market is in a correction.

The prices of small and mid-cap stocks are generally more volatile than large cap stocks. No investment strategy assures a profit or protects against a loss.  Investing involves risks, including possible loss of principal.