He came up with a quantitative system that filters for growing and cash-generating companies.If you're looking for a quick trade, charts and scanners can be enough to spot momentum. But if your approach is to hold longer-term, scouring for companies with solid fundamentals and strong balance sheets should be your approach.
"I came to the belief that there's a lot of these strategies and data that continues to be unused by most investors," Risenhoover said."And perhaps because it's out of their reach or perhaps because it requires some quantitative analysis that's out of the reach of individual investors." The results showed a 20% compound annual growth rate. Its benchmark, the Russell 2000, had a 10.33% CAGR.
Stocks tied to commodity cycles, like oil exploration, gas, and mining, are also excluded because their profits are more connected to commodity prices rather than efficiencies in the company. However, industrial organic chemicals are included. Therefore, the stocks are checked against their three-year historical data. The names are then ranked using two types of scores out of 100:A quality score based on revenue growth over the past 3 years, average operating cash return on invested capital over the past 3 years, and the change in OCROIC over the past 3 years.
"So what I have found frequently is that I have bought a company that ranked number one on this list, and I've watched it decline in value for another six months before it turns around," Risenhoover said."And that can be very difficult to stomach. It doesn't mean it's a bad pick, it just means that the time frame on this is longer than a lot of people can stomach."