The Applied Finance Group’s (AFG’s) multi-factor Investment Grade model was designed to provide a simplified grading system that attaches a letter grade of A-F to every company in our database based on proprietary metrics that include Valuation, Quality and Momentum variables. This allows investment firms to quickly assess the attractiveness of any stock in our database based on its overall letter grade and essentially utilize Investment Grade as a screening tool to manage equity portfolios. Backtests show that incorporating a strategy of buying A & B grade companies, holding C grade firms and selling/avoiding D & F grade firms leads to consistent outperformance. The chart below highlights the performance achieved by the Investment Grade model and reinforces the impact of implementing a strategy of owning A’s & B’s and avoiding D’s & F’s as you can clearly see a clean monotonic relationship from grades A through F.
While most of the efforts we put forth from our analyst-driven products, model portfolios and investment ideas tend to focus on attractive/undervalued stocks likely to outperform, we believe it is just as vital to identify stocks that exhibit traits of companies likely to underperform. F Grade companies are potential torpedo stocks that should be avoided or carefully reviewed if a current holding. Being that the Investment Grade model has been highly successful at identifying companies that tend to underperform, as evidenced by the performance of F Grade companies, we want to provide a list of companies that are currently flagged as potential torpedoes. The 15 companies listed below all currently earn an Investment Grade of F and look very overvalued from a valuation perspective. This list can serve as a red flag for investors who may own any of these companies or are considering adding any of these names.
15 S&P 500 Companies to Avoid