One of the main value added resources that we provide our clients is the ability to filter through large lists of stocks or entire indices and quickly gauge the attractiveness of each company as an investment opportunity via our Investment Grade™ model. AFG’s Investment Grade™ methodology utilizes a multi-factor, weighted model that grades companies on the basis of Valuation, Economic Margin Momentum, Earnings Quality and Management Quality. AFG’s Investment Grade™ model designates a letter grade (A through F) for each of the factors mentioned above and then applies an overall letter grade to each company based on its overall attractiveness as an investment.
This model not only takes into account valuation, economic performance, quality and momentum factors but also applies different weightings to each factor on a monthly basis based on what is currently working in the market. By applying different weights to each factor we are able to take advantage of current market trends as well as reducing the risk of being overly affected by one economic factor in a negative way.
The charts below reflect how AFG’s Investment Grade model has performed within the Russell 2000 index. The top chart highlights how AFG’s Investment Grade has performed in the small-cap index so far YTD while the second chart shows how well the model has worked over a longer time horizon (1998 to 2014). In both time periods the A’s, B’s and C grade companies outperformed the overall universe while the D and F rated companies underperformed the index significantly. Our backtests have proven that by eliminating D and F graded companies from your list of constituents and using A and B graded companies as a starting pool of companies to own, investors can put themselves in a better starting position to outperform.
In the table below you will find 20 “A” graded companies from the Russell 2000 Index. These companies contain several characteristics of firms that are likely to outperform index benchmarks as well as sector peers. This list can serve as a solid starting point for investors looking for small-cap investment ideas.