10/19/2017

Two important ways that we help clients to improve their overall market IQ is with our “What’s Working” interface and via our ability to understand embedded expectations in stock prices. These tools allow users to quickly gauge the overall attractiveness of any segment of the market, which metrics are adding the most alpha in any specific time period and position your portfolio to take advantage of insights not readily available to most investment firms.

What’s Working?

AFG’s What’s Working Interface is a fully customizable tool that enables investors to quickly understand what variables are adding the most value in any time horizon. You can search any time horizon from 1 month to 10 years and utilize any subset of companies by index/sector/market cap/growth-value orientation etc. This allows investors to understand and in turn communicate with clients which factors are driving the returns of the market or any given sector or sub-set of companies. We provide this information on both traditional metrics such as P/E, EPS Growth, Dividend Yield etc. along with AFG proprietary metrics as Valuation, Investment Grade and Company Grade.

This not only helps our clients understand and communicate what is going on in the market but also enables us to adjust the weights of factors within our multi-factor Investment Grade that takes into account Valuation, Momentum and Quality factors on the fly. While we always place a significant amount of importance on our valuation metrics, there are times when other factors are driving the market and we are able to nimbly make adjustments in order to ensure we are always taking full advantage of “What’s Working” in the market

In the table below you can see the 1 year performance (July 2016 to 2017) within the S&P 500 for a few of the variable that we track (some traditional some proprietary). Users have full control to change the universe or time frame to understand which metrics are driving returns and which are being a drag and adjust portfolios/communication accordingly. Each of the factors are broken up into quintile buckets labeled A-F based on company rank within each factor. For our proprietary metrics, the goal is a clean, monotonic relationship from A to F (ie. A Grade companies outperform B companies, which outperform C Grade companies and so on).

Implied Data

Another unique set of insights that we provide to our clients is understanding the expectations that are baked-in to the current price of a stock. One particularly important set of data to understand is imbedded sales growth expectations, or essentially what a company needs to deliver in sales growth over the next 5 years to justify its current trading price.

AFG’s Value Expectations interface essentially “reverse engineers” what a company needs to deliver in sales growth over the next 5 years (assuming 5 Year Median Margins and Asset Turns) to justify its current trading price. The Implied Sales Growth then serves as the “Hurdle Rate” for the stock to determine how likely a firm will be to deliver the sales growth necessary to deliver adequate returns for investors. Companies with the highest hurdle rates have proven to be more likely to underperform than companies with realistic expectations for priced-in sales growth.

When we aggregate this expectations data for the entire for a sector or an entire index like the S&P 500 we can get an estimate of how attractive the segment of the market looks as a whole, and identify when expectations move outside of normal range (-1.5/+1.5 StdDev). When the implied sales growth moves outside the -1.5/+1.5 StdDev threshold it signals extreme valuation levels and an opportunity to advise clients to either enter/exit or reduce/increase exposure to a segment of the market.

Currently the median company in the S&P500 is priced to grow revenue by around 11% over the next 5 years, while the median company has delivered just under 8% revenue growth on average over the past 5 years. This signals that the index is currently has high expectations yet still within the normal valuation range. Similar analyses can be done on any sector or sub-segment of the market.