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Our process starts with a proprietary quantitative model that makes an estimate of the long-term normalized earnings power of all of the companies in our capitalization range. The calculation of normalized earnings is based on the principle of mean reversion. We calculate the ratio of price to normalized earnings, and rank stocks from low to high on that metric. The stocks with low price/normalized earnings tend to exhibit traditional value characteristics: low P/B, low P/E, and low price/cash flow. Stocks ranking in the top quintile by our quantitative tool are the source of our ideas. From this focus list of investment ideas, our CIO prioritizes research projects. We then undertake an initial evaluation of companies on the priority list to understand the investment controversy and to generate a preliminary earnings forecast. This is used as a basis for further team discussions to determine what additional research would be required to reach a decision on the stock, and whether such research is likely to be the most productive use of the analyst’s time. If we decide to move forward, we conduct intensive fundamental research. We seek to gain a unique understanding of the operational, strategic, financial and competitive issues facing the company. Once we complete the research, the analyst constructs a detailed five-year forecast of the company’s financials. This forecast provides the basis for a team discussion of the investment’s merits and risks. We refer to this discussion as "research review," the outcome of which is an investment decision. We have used this process for many years and our experience enhances our commitment to its implementation. Further, our senior investment professionals have worked in the small- and mid-cap space for the majority of their careers, providing them with a level of familiarity with a large portion of the universe as well as with the vagaries of small companies that few managers can match. > Philosophy > Research © 2008 Evercore Asset Management, LLC / Terms of Use / Evercore Partners
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