Our Ranking
Our proprietary investment analysis system is able to rank the 1200 companies I keep in our database according to several factors. These factors lead us to six ranks based upon traditional investment concepts: Earnings Growth, Financial Strength, Value, Momentum, Quality and Fundamentals. Each of the rankings combines several financial ratios that reflect each of the above investment concepts, and they are chosen based upon years of analysis that show that these specific ratios provide me with a clear picture of how the company fairs under each concept. They are ranked from 100 (best) to 1 (worst) on a relative basis to their industry and to the S&P 1500.
Fundamental Ranked Companies
In the first three entries in this series, we looked at Quality Ranked companies , Earnings Growth Ranked companies, and Financial Strength Ranked companies. Today, we are going to look at another of our concept-based ranks: Fundamental.
Our Fundamental Rank is the most complex of the ranking systems and encompasses 87 financial ratios related to the Balance Sheet, Income Statement, Statement of Cash Flows and the Effectiveness of Company Management. The ratios rank the companies against their industry as well as the S&P 1500.
Based upon this, below are a selection of companies from our database that are ranked Fundamentally Strong with a rank above 90 and a history of strong bear market performance plus those ranked Fundamentally Weak with a rank below 60 and a history of weak bear market performance.
| Fundamentals | Company Name | Fundamental Rank | 3-yr Avg Return |
|---|---|---|---|
|
Fundamentally Strong |
Dollar General Corp |
99.3 |
32% |
|
Fundamentally Strong |
Intel Corp |
96.8 |
2% |
|
Fundamentally Strong |
Kirkland Lake Gold Ltd |
92.4 |
33% |
|
Fundamentally Strong |
Eli Lilly and Co |
90.1 |
35% |
|
Fundamentally Strong |
Mercury General Corp |
98.7 |
14% |
|
Fundamentally Strong |
Progressive Corp |
95.5 |
20% |
|
Fundamentally Strong |
QuinStreet Inc |
91.8 |
10% |
|
Fundamentally Strong |
Ross Stores Inc |
98.7 |
16% |
|
Fundamentally Strong |
Boston Beer Co Inc |
94.7 |
61% |
|
Fundamentally Strong |
UnitedHealth Group Inc |
98.9 |
20% |
|
Fundamentally Weak |
Apogee Enterprises Inc |
59.5 |
-2% |
|
Fundamentally Weak |
Devon Energy Corp |
58.6 |
-8% |
|
Fundamentally Weak |
General Electric Co |
42.5 |
1% |
|
Fundamentally Weak |
The St. Joe Co |
36.3 |
39% |
|
Fundamentally Weak |
Limoneira Co |
33.1 |
-7% |
|
Fundamentally Weak |
Phillips 66 |
59.8 |
-6% |
|
Fundamentally Weak |
Raytheon Technologies Corp |
54.6 |
2% |
|
Fundamentally Weak |
Splunk Inc |
48.9 |
2% |
|
Fundamentally Weak |
Valero Energy Corp |
53.2 |
-9% |
A review of the chart above will indicate that the companies ranked as Fundamentally Strong performed better on average over the past three years than those ranked as Fundamentally Weak. So, lets look at the scatter graph for a visual analysis:
Looking at the graph, it is easy to conclude that the companies ranked Fundamentally Strong have out-performed those ranked Fundamentally Weak on average over the past three years.
Why Is This Important Now?
In the first entry in this series, I mentioned that the Federal Reserve had begun to discuss tightening monetary policy, an event that has in the past led to stock market corrections and sometimes full bear markets. Given their recent statements, it is prudent to know how companies will perform when there is not a significant stimulus pushing their stock prices higher.
Investment Strategy
In the normal course of portfolio management during this period in time where we have been warned that monetary tightening is in the plans, we want to book the gains on the companies that show the least ability to withstand a bear market and focus on the companies that have the best ability to withstand a bear market. We do not want to see the gains we have made be lost by not monetizing them when the market tells us it is time.
What’s Next?
In Part Five of this series, we will look at what happens when we combine the ranks discussed in the first four parts of this series.
-Mark
