It is no surprise that the largest market cap companies in the market tend to dominate headlines and bring in the most client questions. There is no shortage of coverage and analysis on these firms, however, we believe that incorporating AFG’s Economic Margin (EM) methodology and Investment Grade model can provide investment firms with a significant advantage when coming to meaningful valuation conclusions on these high-profile names or any stocks for that matter.
AFG’s EM methodology focuses on profit from an economic cash flow perspective, essentially measuring the return a company earns above or below its true economic cost of capital. We have developed a corporate performance metric that accounts for the investment needed to generate earnings, cost of capital, inflation and cash flow that provides a more complete view of a company’s value and corrects many of the shortcomings found in traditional accounting-based valuation methods. We believe a more refined measurement of corporate performance such as an EM allows for a superior starting point in predicting a firm’s ability to create shareholder wealth.
The EM methodology serves as the backbone of our Investment Grade model as it adequately addresses the four main drivers of value (profitability, competition, growth & cost of capital). AFG’s Investment Grade methodology is a multi-factor model that assigns a letter grade of A-F to each company in our database based on the overall attractiveness as an investment opportunity. The Investment Grade model factors in the valuation, momentum and quality characteristics of each firm to come to an overall Investment Grade. The model is dynamic in nature as the weightings of each factor within the Investment Grade model are adjusted monthly to ensure that the factors that are adding the most value are weighted accordingly.
The chart below highlights the spreads achieved by our Investment Grade Model from A-F grade companies (1998-2016). Over the long term, sticking to a strategy of buying buckets of stocks that earn an Investment Grade of A or B and avoiding stocks with F Grades has proven to help investors outperform.
Since we believe that we have developed a better mousetrap for analyzing securities, we will give our thoughts on the top 20 largest market cap companies by identifying the 5 most and least attractive stocks in the list. To learn more about our Investment Grade model and how we use it to analyze securities or to get the Investment Grades for all 20 names email us at email@example.com to discuss in detail.
20 Largest Market Cap Companies
To receive our free monthly research newsletter that is emailed exclusively to investment managers that features buy ideas, thoughts on market conditions and portfolio management solutions. This will keep you updated on our latest research and provide more insight into our Economic Margin framework.