What Is Joel Litman’s L.O.C.K. System? (Hidden Alpha)

In a recent presentation, investment guru Joel Litman said that the “L.O.C.K. system” can help you uncover “high-flying stocks on the verge of beating the market.”

And according to Litman, he uses this system as part of Hidden Alpha, a stock advisory service he runs aimed at helping subscribers find high potential stocks.

But what exactly is the L.O.C.K. system? How does it work? And is it the real deal?

That’s what I’ll be discussing in this post.

Let’s start by looking into the system Joel Litman is pitching. Then, I’ll show you what Hidden Alpha is about and give you some insight into who’s behind it.

What Is the L.O.C.K. System?

Joel Litman uses the L.O.C.K. system as part of the Hidden Alpha stock advisory service, and he says that “L.O.C.K.” stands for Locate, Operations, Calls, and Kick it or Keep it.

• L: Locate
• O: Operations
• C: Calls
• K: Kick it or Keep it

What does each of these mean?

Let’s take a look…

Locate

The first part of the L.O.C.K. system stands for “Locate,” which involves identifying stocks that are either grossly undervalued or overvalued using the “Altimeter.”

“In Hidden Alpha, I use what I call the L.O.C.K. system.

The Altimeter is the first part of that system.

L for Locate.”

What is the Altimeter?

The Altimeter is a stock screening tool developed by Joel Litman that he and his team use to “correct” 130 general accounting flaws in the earnings reports of public companies.

“You see, in Hidden Alpha, I use my Altimeter stock market system to spot stocks who are grossly under or overvalued.

I do that by correcting the 130 general accounting flaws in each company’s earnings reports.”

And according to Litman, when you apply his specific accounting principles to a given company, it can change its numbers and the outlook for the stock drastically.

“Well, I’ve identified over 130 flaws and discrepancies in the general accounting standards used to keep the books of most American corporations.

These are the same numbers that are fed to the so-called experts.

And to the general public, who uses this information – like earnings, revenue, debts, P/E ratio – to guide their investing decisions.

But when you apply my specific accounting principles, correcting these 130 flaws…

The numbers – and the outlook for the stock – can change drastically.”

How does it work?

According to Litman, he and his team of 100-plus accountants and analysts “take apart the financial statements” of 10,000s of publicly traded companies and then “reassemble them” using “globally consistent standards.”

I’m not an accountant, nor do I have special knowledge of each “flaw” Joel Litman is referring to. But my understanding is that Litman and his team take the (actual) financials companies publish in their earnings reports and essentially “reconstruct” them.

From there, the “reassembled” information is fed into the Altimeter, which is a stock grading tool that spits out a bullish, neutral, or bearish grade when you type a ticker into it.

The Altimeter is actually a separate, stand-alone product that Altimetry sells for $99 per month. However, it also constitutes the “L” part of the L.O.C.K. system, which Joel Litman uses to identify the stock ideas he shares with subscribes of Hidden Alpha.

So with all that said, let’s look at the next part of the system.

Operations

After narrowing down the list of stocks analyzed by the Altimeter to “30 to 200 outlier stocks,” Joel Litman says that the next part of the L.O.C.K. system is “Operations.”

“Once I’ve narrowed the list down to anywhere from 30 to 200 outlier stocks, I take a deeper look at company Operations.

That’s the O in L.O.C.K.”

According to Joel Litman, this is where he and his team of accountants and analysts look at things like the people running the company, their long-term strategy, and what industries are critical to the company’s growth.

Calls

The third part of the system, “Calls,” is where Litman and his team analyze quarterly earnings calls using an electro-audiogram (EAG).

I first learned about this when I was looking into Litman’s Alpha Profit Code presentation, and I was intrigued by this because, well… it’s pretty out there (lol). According to Litman, it’s “like putting every CEO up to a sophisticated lie detector test.”

“I use what’s called an electro-audiogram (EAG) to analyze quarterly earnings calls for changes in the CEO’s pitch and voice patterns.

It’s like putting every CEO up to a sophisticated lie detector test.

My system has nine different speech markers it uses to gauge whether the speaker believes what they’re saying.”

Not only does Litman suggest that this system can help him figure out when someone’s hiding something during an earnings call, but he says it has helped him pick up on “hidden excitement,” which he suggests has led to some of his “biggest winners.”

Kick it or Keep it

The last part of the system (“K”) stands for “Kick it or Keep it.” In other words, this step is about deciding whether to recommend the stock or not. And according to Litman, once this decision is made, he issues a buy or sell recommendation to Hidden Alpha subscribers.

“The final decision is the K in L.O.C.K.

Kick it or Keep it.

After that I issue a buy or sell recommendation.”

What Is Hidden Alpha?

Hidden Alpha is an investment research service run by Joel Litman that uses the L.O.C.K. system to help identify the stock ideas he shares with subscribers.

Each month, Litman sends subscribers a new issue of Hidden Alpha that contains his latest stock pick, research related to the company he’s recommending, updates on stocks he’s already recommended, and the following reports.

• The Altimeter’s Three Favorite Tech Companies
• Buy These Two Banks Before the Next Rate Hike
• The 14 Stocks to Avoid When the Fed Raises Rates
• How to Be a Stock Cop: The Secrets of the L.O.C.K. System

How much does it cost?

According to the Altimetry website, Hidden Alpha usually costs $199 per year.

However, as part of Litman’s recent presentation dubbed the “emergency interest rate summit,” where he discussed the L.O.C.K. system, it costs $49 for the first year and automatically renews at the regular price after that.

And if you sign up through this same presentation, the service comes with access to the “S&P 500 Altimeter,” which appears to be a version of the Altimeter that allows you to analyze stocks in the S&P 500 index.

Is Hidden Alpha legit and worthwhile?

I’ve written about Joel Litman’s presentations and services a few times on this blog, and my research suggests that he is the real deal. The same is true for the company he runs (Altimetry) and the Hidden Alpha service itself.

As for whether or not it’s worthwhile, this will depend on things like your goals and preferences. But if what Joel Litman says is anything to go by, Hidden Alpha has a solid track record. Not only did he share examples of numerous triple-digit stocks he’s identified over the years, but the average track record is impressive.

“Now of course, all investments carry risk and past performance does not guarantee future success. Our average gain since inception is 35.3%.”

So, while there’s no guarantee you’ll make money following his picks, and there are always risks involved, Hidden Alpha is a legit service that could be worthwhile.

Who Is Joel Litman?

Professor Joel Litman is the CEO of a financial research firm called Valens Research, which (from what I understand) owns Altimetry, the company behind Hidden Alpha.

According to Litman’s Altimetry profile, he’s also a Certified Public Accountant, has worked for Credit Suisse, taught at prestigious universities, and shared his insights on popular media outlets like CNBC and Forbes.

During the presentation, Litman also said he’s a forensic accountant who’s often referred to as a “stock cop” given how he investigates company operations.

“A lot of folks like to call me a ‘stock cop’ because I investigate company operations like a crime scene. I look for clues others miss.

But, the technical term for my job is a bit more boring.

I’m what’s called a ‘forensic accountant.'”

So aside from being a stock picker, Litman runs a respected research firm and has an extensive background in the finance and accounting space.

As mentioned, I’ve looked into some of his presentations on this blog too. For instance, I recently wrote about his SynBio (synthetic biology) stock picks. So if you want to see what other companies he’s tracking, check out the article I just linked to.

What Is Litman’s “Rate Hike” Prediction?

The presentation that led me to learn about the L.O.C.K. system in the first place (dubbed the “emergency interest rate summit”) centered around Joel Litman’s take on the Federal Reserve raising rates and the impact this could have on the stock market.

This is something many are talking about in the finance space, and it’s relevant to the LOCK system, so I thought I’d take a moment to summarize what he discussed.

So, what’s Litman’s thesis?

To start with, he said that the system has detected an “odd shift in the market.”

“Now, I see the same thing happening with the Federal Reserve’s interest rate hikes.

And my system has detected an odd shift in the market. Some stocks that are currently very popular could be headed for a fall.

And a few others who have been flying under the radar could see huge gains.”

From what I can gather, this “odd shift” relates to Litman’s belief that some “very specific types of stocks are headed for massive losses” while others could do well.

He also said that rising rates don’t hurt the stock market; high rates do. And he suggested we are still in a bull market, so the important thing is to be more selective.

“Rising rates don’t hurt the stock market…

High rates do.”

[…]

“We’re in a bull market with a long, long way to run Jared.

There are plenty of big winners ahead. Investors just have to be more selective about what they buy.”

What types of stocks is he bearish on?

Litman said he believes three types of recently popular stocks “are going to suffer” moving forward. And these included “tech stocks with no current earnings,” “biotech stocks with no approved drugs,” and “IPOs, SPACs and crypto-related stocks.”

For the most part, Litman’s main concern seems to revolve around company revenues. He pointed out that since the Fed began signaling an intent to raise rates, companies making a loss have seen a drop in price while profitable companies are up.

“Since the Federal Reserve began signaling an intent to raise rates, loss-making companies on the Nasdaq have dropped 28%.

Profitable companies on the same index are up .7% over the same period.”

As for what he’s bullish on, Litman believes we’re still in a bull market for technology, but only in certain industries. And he specifically mentioned technologies that are “right here and now,” including 5G, IoT, EVs, and AVs, suggesting that these types of companies are more likely to grow revenues regardless of what happens with rates.

“You see, Jared, we are still in a bull market, particularly in technology.

Things like the metaverse and virtual reality may be years away still.

But 5G, the Internet of Things, electric and even autonomous vehicle technologies are right here and now.

In fact, these industries alone could be worth trillions of dollars over the next couple of years.

And the companies involved in these technologies will continue to grow their revenues – rate hike or no rate hike. It doesn’t matter.”

As for specific stocks he’s tracking, Joel Litman shares the names of the companies he recommends avoiding and which ones he’s bullish on in the reports I mentioned earlier, which come with a subscription to Hidden Alpha. So if you want to know about those, the best thing to do would be to check out the service.

Bottom Line

To recap, “L.O.C.K.” stands for Locate, Operations, Calls, and Kick it or Keep it.

The first part of the system involves using the Altimeter, a stock grading system, to narrow down the best potential stocks. Next, Litman and his team look at the company’s operations. Then, he analyzes quarterly earnings calls to narrow down the list further.

Finally, Litman decides whether or not to “kick” or “keep” the stock, and if he does keep it, the stock is recommended to subscribers of the Hidden Alpha service.

I can’t predict how well the system will work if you decide to sign up, but Joel Litman is a genuine expert, and his Hidden Alpha service is the real deal. So you may find the research and insights he shares worthwhile in the long term.

Either way, thanks for reading. I hope you found this post helpful. And if you’d like to add your two cents to this post, feel free to chime in below.