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 – Third 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.

Financial Strength Ranked Companies

In the first two entries in this series, we looked at Quality Ranked companies and Earnings Growth Ranked companies. Today, we are going to look at another of our concept-based ranks: Financial Strength.

Our Financial Strength Rank combines our Quality Rank with several Value related ratios that help rank the company based upon earnings valuation (e.g., Price/Earnings), sales valuation (e.g., Price/Sales), free cash flow (e.g., FCF/Enterprise Value), and asset valuation (e.g., Price/Book), among others.

Based upon this, below are a selection of companies from our database that are ranked Financially Strong with a rank above 90 and a history of strong bear market performance plus those ranked Financially Weak with a rank below 60 and a history of weak bear market performance.

Financials Company Name Financial Strength Rating 3-yr Avg Return
Strong Financials
Dollar General Corp
90.4
32%
Strong Financials
Barrick Gold Corp
98.5
24%
Strong Financials
Intel Corp
91.5
2%
Strong Financials
Kirkland Lake Gold Ltd
97.6
33%
Strong Financials
Mercury General Corp
98.1
14%
Strong Financials
Newmont Corp
98.2
26%
Strong Financials
Progressive Corp
95.9
20%
Strong Financials
Southern Copper Corp
95.6
16%
Strong Financials
UnitedHealth Group Inc
93.5
20%
Weak Financials
Alaska Air Group Inc
48.2
6%
Weak Financials
Bank of America Corp
42.3
15%
Weak Financials
Chevron Corp
40.8
-1%
Weak Financials
General Electric Co
41.3
1%
Weak Financials
Intuitive Surgical Inc
54.8
20%
Weak Financials
Palo Alto Networks Inc
35.2
20%
Weak Financials
Phillips 66
58.2
-6%
Weak Financials
Raytheon Technologies Corp
56.3
2%
Weak Financials
Splunk Inc
30.7
2%
Weak Financials
Truist Financial Corp
58.4
8%
Weak Financials
Wells Fargo & Co
58.2
-2%
Weak Financials
Exxon Mobil Corp
58.3
-5%

A review of the chart above will indicate that the companies ranked as having Strong Financials performed better on average over the past three years than those ranked as having Weak Financials. So, lets look at the scatter graph for a visual analysis:

high and low quality 3

Looking at the graph, it is easy to conclude that the companies ranked with Strong Financials have out-performed those with Weak Financials 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 Four of this series, we will look at our Fundamental 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