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The Development of Torpedo Alert ®
The idea for the ratings grew out of our experience over
the past decade in identifying high quality companies as long ideas
for institutional research clients. While this service has generated
excess returns of at least 5 percent annualized in each market cap
group, we wondered about developing a systematic way to review
companies and avoid the experience of a blowup on our recommended
list.
After reviewing dozens of articles and
books, and by analyzing hundreds of companies that significantly
underperformed each year for five years, Jefferson determined the
general causes of blowups and the key variables that provide
detection in advance. The causes include:
- Aggressive Accounting
- Deteriorating Financial Condition
- Change in Industry or Company Competitive Situation
- Bad Acquisition
- Overvaluation
Jefferson then delineated ten key dimensions indicative of
a company's overall fundamental health that capture these general
causes. These dimensions are segments of a company's overall
fundamental health and are measured through individual variables
which best reflect the dimension.
For example, the Liquidity dimension is
measured using the following variables: current ratio, quick ratio,
cash position and Altman Z-score.
Based on extensive testing of these
variables, it was possible to develop a proprietary rating system
that maximizes the chances of correctly identifying potential
problems: the Torpedo Alert® Research
Service.
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