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Claudia Mott is an authority in the institutional
investors' circles specialized in the small capitalization securities.
Prudential Securities first vice-president and director of the research
centre on small capitalizations, Claudia Mott supports a mechanical and
quantitative approach of the investment.
One of the market anomalies she prefers is the
surprise profits one. Research she conducts with her Prudential Securities
team have convinced her that the strategy which consists in choosing
securities according to the non expected profits (profits which exceed the
analysts' expectations) is one of the best methods in the small
capitalizations segment.
A rather lucrative strategy of investment in the
small capitalization company segment would thus consist in buying the
securities whose expected profits have been revised upwards by the financial
analysts of the large broker firms whose responsability is precisely to make
recommendations.
Such a strategy, based on the quantitative analysis,
would have the advantage of functioning with any market conditions, it does
not matter that they are growth or value securities, a bull or bear market,
and it also does not matter what the industrial sector is.
Satya Pradhuman, senior quantitative analyst at
Merrill Lynch, includes in this model three criteria she balances the
following way: 1- the first criterion, weighted at 40%, is the relative
growth of the security price or what is called the price momentum (the more
the price of a security increased over the last year, the better is its
pointing); 2- the second criterion, weighted at 30%, is related to the
extent of the revision, upwards, of the company profits by the analysts (the
more the expected profits are corrected with a significant margin, the
better the pointing of the security); 3- the last criterion, weighted at 30%
of the final note, stresses a low price/cash flow ratio (a measurement
similar to the price/earnings ratio, but less prone to accounting
manipulations).
From 1980 to 1995, this strategy, called Aurora,
would have generated an average annual return of 31%. During a more bearish
market, Pradhuman recommends to change the weighting of the three criteria
as follows: 15% for the criterion of the profits revision, 15% for the stock
momentum price and 70% for the price/cash flow ratio. This alternative of
the model would have generated an annual return of 25% between 1980 and
1995. Interesting isn't it?
André Gosselin
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