We believe markets are semi-efficient. Companies that possess good investment characteristics do not necessarily generate positive returns or alpha. We focus instead on those for which we can explicitly quantify a positive gap between market perception and reality.
- During moments of fundamental change, companies are generally more difficult to analyze and forecast. Due tomarket inertia, analysts tend to be more conservative in their projection assumptions, which can lead to significant gaps between consensus expectations and actual results.
- Alpha is created when there is a material divergence between market perception and reality. When a positive information event is released to the public, market perception resets upward to match this newly discovered reality.
- Blackcrane’s empirical study, “Extracting Alpha During Positive Earnings,” (available by request) demonstrates that investing in companies that consistently deliver earnings above market expectations led to persistent excess returns throughout the market cycle.
- We set a minimum 10% upside on earnings delta target for each of our investment candidates. This is one of the core drivers that define our entry point.
Our goal is to achieve at least 500 basis points of excess returns over the full market cycle or a long-term absolute return of 10-15%.