Q: What is the history and mission of the company? A: AlphaMark Advisors provides asset management and investment advisory services since 1999 and current manage around $250 million. Since founding the firm we have grown from a separately managed account manager to being a mutual fund manager, of which I am Chief Investment Officer. We started as a large cap growth manager and later in 2005 we expanded to running a small cap growth fund too, applying the investment philosophies and principles we developed while managing our large cap fund. In October 2008, we decided to take both of our large cap growth and small cap growth strategies and also offer them as a mutual fund. The mission of the firm is to achieve superior risk‐adjusted performance during all market conditions. Q: What differentiates your small cap fund from its peers? A: Our fund is small and that allows us to be nimble. Moreover, our uniqueness lies in the fact that we use a cash flow valuation technique to value all the individual holdings. Our focus on cash-flow based analysis is not that common in this segment of the market, where most investors are looking for earnings momentum. Q: What core beliefs or principles guide your investment philosophy? A: We are looking for earnings momentum in high-quality companies that can produce cash flows in any market environment. Our definition of proven or high-quality company is one that has a proven track record over the last three years. We think of earnings momentum as a slight predictor of future performance of the stock price. Our belief is that superior returns come from superior security selection and a prudent sell discipline. Basically, our investment philosophy is grounded in higher appreciation of risk. Q: Does the valuation technique play a role in your investment strategy? A: The valuation technique comes into play once stocks are identified through our screening process. We approach the cash flows of a company in three different ways. First, we estimate the intrinsic value of the company using only 5% growth rate and identify companies that are at least 20% undervalued in the market. Our conservative growth estimate protects us from paying inflated price for the stock. Second, we try to uncover a growing company with earnings momentum before the market has recognized it. To this end, we seek companies that have fallen out of favor, or the market doesn’t trust it or their name has been tarnished. But still, these companies should have a three-year historical track record of growing earnings and revenue and in our estimate should be able to sustain these rates in the near future. To sum it up, we employ a proprietary three‐tier cash flow model to identify companies that can produce reliable cash flow streams and are priced at a level that justifies the growth opportunity. Q: What is your investment process? A: The investment process starts by running a screen where we identify small cap companies that over the past three years averaged 14% in revenue growth, 16% in earnings growth, and have returned on capital more than 15%. One of the pre-requisites of our process is finding companies that know how to use their capital efficiently and wisely. Lastly, we focus on companies whose earnings estimates over the last 90 days for the current year have increased by 8% or more and bring them under our cash flow model to isolate the companies that we truly like the valuation of. After the screening process is over, we look at cash flows in three different ways. One is how the company has reported them, two is we try to take out any manipulations that might be in cash flow based on recent news in the accounts receivables or payables that makes the cash flows look better or worse than they are and then third, calculating our own estimate of cash flows. Next, we estimate an intrinsic value of the company using a moderate growth of 5% and identify companies that are 20% undervalued versus its current market price. Lastly, we get a list of 50 names or so which we run through our cash flow valuation which whittles down the names available for investing. In addition, if two companies are valued close enough, we apply fundamental analysis and dig deeper to understand the business. We also look at the ratio of price-to-sales to operating margins over three years and identify why a company is cheaper than the other based on that ratio. In terms of the balance sheet, we avoid a company that has half of its assets as goodwill or intangibles backed up by a decent amount of debt. That is the red flag immediately. We also look at the overall ratio of debt. We are not interested in having companies that have stacked on enormous amounts of debt and whose inventories are growing quicker than sales. We identify growing companies by trends in past and forecasted revenues and earnings and select only those companies that have a sustainable business model through various economic conditions. The fundamental thesis for a company to become our holding is firstly, it should pass our screening process, and secondly, a new stock only comes into our fund when another holding in the fund has met our sell discipline. So in other words, even if a great name pops up in our screening, it doesn’t automatically get into our fund. Q: Can you give us one or two historical examples to illustrate your investment process? A: One of our holdings is Netflix, Inc., the company that mails movies through subscription services and generates strong cash flow. Netflix was screened out through our model. The valuation was well below its intrinsic value. Next, we looked at the balance sheet. In our findings, we found that Netflix has been focusing on Internet growth. Moreover, this company also uses capital very efficiently. To give another example, we bought Deckers Outdoor Corporation in March. The company sells footwear and accessories. We found that when it popped up in our screen, it met our valuation criteria and was cheaper than our intrinsic calculation by 20%. Also, we looked at their balance sheet and inventories. We compared this company with the other apparel manufacturers and made an assessment of their balance sheet management and the type of product they were producing. This company has also proven itself in the current adverse market environment and was included in our portfolio. Q: What is your sell discipline? A: we sell stocks for one of the four reasons. First, if the stock has doubled in price, we sell half of it, regardless. Second, if the stock price has become overvalued by 20% or more based on our proprietary cash flow model, we sell the stock. Third, a stock is sold if there is a material change in company structure or management. Fourth, if the earnings momentum has decreased from previous estimates, we sell the stock. Q: What is your portfolio construction process? A: Our fund has a concentrated portfolio with 25 holdings. We start with a 4% position size and generally do not trim the position until it gets up to 7% or 8% of the portfolio. Currently, the largest position is 4.8% and the smallest position is 3.13%. We do rebalance the portfolio during market extremes by redistributing inflows or outflows. Position sizes of all of our holdings are monitored to ensure that a diversified portfolio is maintained. Being a small cap fund, we do not have restrictions on the sectors that we invest in. We may go as high as 25%, 30% in any one sector, but we are not going to jeopardize portfolio as far as the diversification goes by blindly following what our model is telling us to do. We use a common sense approach to diversification but are not sensitive to the benchmark, namely the Russell 2000 Growth Index. Since there are 25 names it is equal weighted and we are not trying to make distinctions inside of the sectors. An assessment of secular trends in the markets and the economy will also exert some influence on the economic sector weightings of our portfolios. Q: What do you consider as sources of risk in the fund and how do you mitigate them? A: There are many sources of risk in the portfolio and we mitigate them in the following ways. First, if a holding grows to larger than double the starting position, it is automatically cut into half reducing the risk of larger declines in the future. Second, we control risk by managing the diversification process through a commonsense approach. Third, having the sell discipline drive the portfolio and not the buy discipline controls risk. Fourth, our fund is not driven by sector rotation, which avoids significant pitfalls. In other words, sector bets are never used to enhance returns. In conclusion, our philosophy of owning quality stocks with earnings momentum at a reasonable price provides significant support during times of volatility.