Many of the current headlines focused on the US stock market are filled with uncertainty and some pessimism regarding the outlook for investors in 2016. Whether it be the poor start for Stocks in 2016, the possibility that the FED will continue to raise rates, China concerns, or the potentially slow U.S. economic growth there is plenty of cause for concern. While these concerns are valid and should be taken into account, we remain focused on helping our clients identify investment opportunities regardless of market conditions utilizing AFG’s Investment Grade™ model.
AFG’s Investment Grade™ model is a multi-factor, weighted model/grading system for stocks that allows our clients to identify companies that are trading at a discount to intrinsic value, following a sound management strategy, higher quality of earnings (accruals) as well as momentum characteristics inherent in stocks likely to outperform. The model takes into account all of the factors mentioned above and then attaches a simplified letter grade from A to F signaling the attractiveness of a company as an investment opportunity based on the overall score. The major advantage of this model, especially under such volatile market conditions, is that the weightings of each variable are adjusted monthly based on which variables are adding the most alpha. Applying different weights to each variable allows us the flexibility to better position our model to generate the most alpha when market conditions change while avoiding any huge swings in performance of any of the individual variables.
The chart below shows the value that was added to portfolios by using AFG’s Investment Grade model in your investment process. The chart displays AFG’s Investment Grade model return spreads relative to the entire Russell 1000 Index™ in 2015. Our research and backtests have shown that by eliminating D and F graded companies from your list of constituents and using A and B graded companies as a starting pool of companies to own, investors put themselves in a better position to outperform.
Being that AFG’s Investment Grade model was able to add value in identifying attractive investment opportunities as well as helping to avoid owning potential torpedo stocks 2015, we wanted to provide a list of 20 companies that currently earn an Investment Grade of A or B and also look attractive from a valuation perspective. This list can serve as a solid starting pool of companies for investors searching for investment ideas within the Russell 1000 index. While there is a great amount of uncertainty in the market, utilizing a proven valuation process to identify mis-priced securities while supplementing your screens with other proven AFG proprietary metrics has proven over the last 20 years to be a very successful strategy.