New York – From time to time, Integrity ResearchWatch profiles a new or interesting research provider that we have come to know. Today, we would like to introduce our readers to McLean Capital Research.
McLean’s quantitative methodology analyzes a company’s free cash flow and cost of capital in order to generate actionable recommendations. Companies with strong and steady free cash flow are rated as “buys” while those with poor cash flow profiles are rated as “sells”. A low cost of capital classifies a company as a “conservative” risk while those with high cost of capital are rated as “speculative” bets.
What is most unique about the McLean database, we feel, is the rigor and detail of the algorithms it uses to arrive at estimates of a company’s free cash flow and cost of capital – eschewing shortcuts to come to the most accurate figures possible. The database keeps track of cash flow anomalies at all of the approximately 13,000 non-financial companies that report their financials to the SEC. The firm’s algorithms adjust a company’s accounting metrics to reflect its underlying economic reality so as to accurately measure how the core operations of the business are actually performing.
Furthermore, McLean Capital Research significantly reduces the amount of time it takes to go from filing to cash flow analysis to actionable recommendation. The firm typically issues an “upside filing alert” to clients within only hours of a favorable and relevant change to a company’s reported cash flow. In addition, McLean Capital is able to carry out a custom portfolio evaluation that applies its quantitative cash flow discipline to a client’s existing portfolio or watchlist.
The research database regularly turns up intriguing recommendations – in particular, it does a good job of highlighting smaller companies with favorable cash-flow characteristics and valuation that may otherwise have slipped under the radar screen of most analysts. Richard McLean, the CEO of the firm, is an experienced money manager, and uses this methodology to make many of his own portfolio decisions.
Some recent performance data are available along with backtested results. While clients typically discount backtested data, the actual performance statistics (measured over a mediocre two years for the stock market as a whole) suggest that the McLean methodology has the potential to outperform in both small-cap and large-cap arenas. The significant outperformance of the McLean small cap portfolio makes intuitive sense, as one would assume that small cap companies are most likely to be inefficiently valued by the market. However, the outperformance in the large cap portfolio is presumably harder to achieve, and more impressive as a result.
Philosophically, the McLean approach is very much in line with the traditional value principles of Graham & Dodd; however, their quant system allows them to screen a larger number of stocks, react more quickly to emerging opportunities, and recommend trades much more frequently than typical fundamentals-driven value analysis. While this generates relatively high portfolio turnover, we feel that the currently low cost of execution allows this to be a viable strategy. Hence, the McLean Research tool may be of interest to any value-oriented investor.