The Analysts' President

How valid is the opinion of “the crowd”? Looked at from the right perspective—and with the application of some highly sophisticated mathematical formulas—the answer seems to be: Quite valid, indeed.

Since its founding 12 years ago, Great Northern Capital has built an impressive track record by evaluating the collective wisdom of the hundreds of analysts on Wall Street who together follow thousands of stocks. The direction of their thinking forms the basis of a complex, proprietary, quantitative analytical system used by Great Northern to screen hundreds of stocks as potential investments.

Steve Rothmeier, the chairman and CEO of Great Northern, was chairman and chief executive of Northwest Airlines immediately preceding its takeover by Al Checchi and Gary Wilson in 1989. Rothmeier established St. Paul–based Great Northern in 1993. Along with Jay Rothmeier, his younger brother, and Richard Halverson, architect of the firm’s mathematical model, he now manages $125 million in a small-cap fund, plus a small- to mid-cap product and two long-short market-neutral hedge funds (i.e., funds that both hold and short stocks).

{Q} Tell us a little about your investment style—it’s quite distinctive.

{A} Great Northern Capital is a pure quantitative shop, but we don’t do any ‘black-box’ work here. [The term ‘black box’ refers to a computer-driven portfolio-management process, some versions of which actually determine and execute the trades, taking human decision making entirely out of the picture.] Black-box work is basically pattern-based quantitative analysis that relies on historic patterns of data and anomalies in the market. We have a logic-based algorithm that quantifies logical investment decision-making processes that can be repeated consistently.

{Q} The formulas you use focus on the earnings estimates of analysts, correct?

{A} Yes. What we do is download all the earnings estimate revisions—about 1,500 daily—for all listed stocks in the U.S. We then score these stocks based on six major variables, and from that, we create a universe of eligible stocks to buy for the portfolio. So it’s logic-based, quantitative work—not black box. Our process is designed to eliminate all subjectivity from the decision-making process. We follow the model religiously.