To help ensure that doesn't happen with his fund, he uses 70 screens to see what investors are biting at, or in the case of short-sale candidates, spitting out. "At any one time only about 20 of those screens are important," he says. "The trick is that what the market considers important changes over time. On the long side, it's an adaptive valuation process based on what the market is rewarding. On the short side, we simply flip the process around." While investor preferences change, de Silva says those changes occur in waves that tend to persist for long periods of time.
    When de Silva began running the fund in 1997, investors were focused on share buyback programs rather than dividend yield. But after technology stocks fell a few years later, sentiment shifted toward earnings and dividends and high yielding stocks did well, particularly in 2001 and 2002.
    "Last year saw a reversal of that, especially toward the end of the year, and the market became more growth focused," he says. The emphasis now is on companies with strong forecasted earnings to price and cash flow to price, as opposed to dividend yield." Reflecting that view, the fund's dividend yield is now lower than that of the S&P 500 Index, while the portfolio's historical earnings growth rate is higher.
    On the other hand, he says, investors are not overly concerned about operating margins because they believe that in a growing economy companies with high leverage and low operating margins are probably going to do better in the future. Recently, Analytic has been emphasizing stocks outside the blue chip belt that should do well in the continued economic expansion. Stocks that hold appeal include holding company Loews Corp., which has businesses involved in insurance, tobacco, and oil and gas, and agriculture and commodities company Archer Daniels Midland. Short positions have included media company The New York Times because of its poor earnings growth and the unlikelihood that it will benefit from economic expansion.
    Earnings surprises have lifted some stocks, including Darden Restaurants, parent to Olive Garden and Red Lobster, which rallied after it posted a better-than-expected rise in quarterly earnings. Stock of J.C. Penney Co. also posted gains after the company announced that same-store sales rose 2.4 % and the company lifted its financial forecast.
    Negative surprises have included a recent short position in Janus Capital Group, which rallied after the mutual fund company named a new chief executive and reported better-than-expected earnings and strong investor cash flows. An overweight long position in Pfizer also hurt performance when the world's largest drug maker reported a 52% profit decline to increased competition and a slowdown in sales of its highly lucrative drug Lipitor.

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