mark ballard

Mark's Investment Blog

This blog is intended to keep clients and friends current on my investment management activities. In no way is this intended to be investment advice that anyone reading this blog should act upon in their personal investment accounts. There are other significant factors involved in my investment management activities that may not be written about in this blog that are equally as important as the things that are written about that materially impact investment results. Neither is this blog to be construed in any way to be an offer to buy or sell securities. To be notified via e-mail when new posts are made, CLICK HERE TO SUBSCRIBE

Ranking Stocks for Investment – Second in Series

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.

Earnings Growth Ranked Companies

Our Earnings Growth Rank is the original analytical system whose nexus started with my Masters Thesis. The thesis set out to disprove the Efficient Market Hypothesis (yes, that is how long ago it was – it has graduated to a Theory and is no longer a Hypothesis). The synopsis of the thesis was that in spite of the strong support for the Hypothesis, there really are certain financial ratios in the public realm that when viewed as a whole can provide index beating returns over the long run. And given our track record of beating the index over the long run, the Earnings Growth Rank is a very important part of our investment process.

There are several financial ratios that comprise the Earnings Growth Rank, but they can categorized into four main groupings: Earnings Per Share Growth; Sales Growth; Operating Income Growth; and Cash Flow. There are nineteen ratios that are distributed between these four primary groupings, but when taken as a complete package, provide a good look into which companies are investable based upon their income statement.

Below is a non-exhaustive list of companies from our database that are designated either High Growth or Low Growth based upon, among other factors, their Earnings Growth Rank.

Designation Company Name Earnings Growth Rank 3-yr Avg Return
High Growth
Broadcom Inc
98
25%
High Growth
Berkshire Hathaway Inc
95.1
15%
High Growth
Etsy Inc
94.1
73%
High Growth
Genmab A/S
94.9
37%
High Growth
Mercury General Corp
94.6
14%
High Growth
National Fuel Gas Co
94
3%
High Growth
Oracle Corp
92.8
20%
High Growth
PayPal Holdings Inc
95.7
46%
High Growth
Qorvo Inc
98.9
31%
High Growth
Ross Stores Inc
97.8
16%
High Growth
Southern Copper Corp
98.3
16%
High Growth
Skyworks Solutions Inc
98.6
20%
High Growth
Texas Instruments Inc
95.4
20%
Low Growth
Alaska Air Group Inc
42.9
6%
Low Growth
Apogee Enterprises Inc
49.7
-2%
Low Growth
Bank of America Corp
57.5
15%
Low Growth
Compass Minerals International Inc
59.8
6%
Low Growth
Chevron Corp
54.5
-1%
Low Growth
General Electric Co
34.7
1%
Low Growth
Limoneira Co
32.2
-7%
Low Growth
Palo Alto Networks Inc
54.7
20%
Low Growth
Phillips 66
33.1
-6%
Low Growth
Raytheon Technologies Corp
47.3
2%
Low Growth
Splunk Inc
11.9
2%
Low Growth
Valero Energy Corp
43.7
-9%

A quick look at the table gives you a good feel for the fact that the High Growth companies have performed much better over the last three years than the Low Growth companies. This may not always be the case as their are certain times when companies with low earnings growth scores will out-perform those with high earnings growth scores.

Below is a scatter plot that shows you visually the results of the above analysis – it is pretty apparent that the high growth companies performed better over the past three years than the low growth companies., even when taking into consideration the impact of the significant covid correction:

high growth and low growth chart
However, I specifically chose the last three years average return because it included the covid correction in the spring of 2020 for the stock market. I wanted to specifically know which designation performed better during a major correction.

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 their 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 Three of this series, we will look at our Financial Strength Rank to see what it tells us that will be useful in managing portfolios to prepare for a correction or bear market at some point in the future.

 

-Mark