Strategy
Capstone’s Core Equity Growth Portfolio offers investors a separately managed account consisting of high quality, large capitalization stocks. We believe that our disciplined, bottom-up approach which combines objective quantitative work with subjective stock evaluation, will provide above average long-term growth in our clients’ portfolios, while at the same time explicitly controlling for portfolio risk.

A Three Step Approach to Equity Management

STEP ONE: QUANTITATIVE SCREENS
Equity portfolio management is a winnowing process of reducing a large universe of stocks to the 35 to 45 names that are used in clients’ portfolios.

Beginning with a database of large capitalization stocks (generally with a market capitalization no smaller than $5 billion), this universe is screened against four basic criteria as follows: historical growth, expected growth, valuation, and relative price performance. Each of these four criteria contains sub-measures which are indicative of favorable or unfavorable performance. For example, some of the measures used for historical growth include improved earnings per share over the previous year and improved return on equity. Expected growth criteria include the trend in earnings estimates and earnings surprise. Valuation is measured by the stocks price-to-earnings ratio in relation to the market and the company’s own growth rate. Momentum measures include relative stock performance over the past year as well as the relative performance of the industry in which the company participates.

The end result of this quantitative step is a smaller universe which includes only those stocks representing characteristics associated with outperforming the market. It is this group on which we conduct fundamental analysis.

STEP TWO: FUNDAMENTAL ANALYSIS
The heart of Capstone’s fundamental equity analysis focuses on the competitive position of the company within its industry. Extraordinary returns do not arise from ordinary companies. We search for companies which have a demonstrated franchise value. This might arise from a technological edge relative to competitors, better management, or brand recognition. In addition, we seek out companies for whom the threat of new competition or product substitutes is relatively low. Companies that can, to the greatest extent, control product pricing and production costs are most desirable. We have found that industry leaders tend to remain in that position for extended periods of time and pay handsome rewards to patient investors.

Unlike years past when obtaining general company-related information was the difficult part of fundamental research, one of the more difficult fundamental tasks today is the ability to distinguish the useful information from the flood of all the other data which is now so easily obtainable.

STEP THREE: PORTFOLIO FORMATION
After completion of the quantitative and fundamental work lies portfolio formation. At this stage in the process, we generally have more candidates for purchase than places available in the portfolio. Quantitative screens are again used at this point to help select the best stocks and the best weighting of each stock. This is done in order to construct a portfolio the relative risk of which is precisely measured and which is within acceptable risk tolerances. Our record demonstrates that by selecting the best candidates through our quantitative and fundamental steps we can build portfolios which are superior to the market because they offer more return than the market for every unit of risk taken. Moreover, because our process generates multiple candidates for entry into the portfolio, an ongoing competition exists between companies which are held in the portfolio and those which are candidates for entry. This assures that the clients’ account is always assessed not only by the measure of what is owned, but also by what is not owned. Fresh ideas are always available.