The AFG Investment Grade is a fundamentally driven, multi-factor model that ranks companies globally on the basis of:
- VALUATION –Deviations From Intrinsic Value
- MOMENTUM – Economic Margin Revisions and Price Momentum
- QUALITY – Management Strategy and Earnings Quality
When buying a company, you are essentially paying for its future expected performance. AFG calculates intrinsic value by forecasting future levels of economic margins for every company and discounting those cash flows.
Traditional models that use accounting ratios as well as valuation models that lock into perpetuity are making the assumption that a company’s performance will stay constant forever without facing the effects of competition. This is not an economic reality.
AFG takes into account these market forces by incorporating a Competitive Advantage Period
(CAP) – the time frame that competition will compete away economic profits.
The reason why great companies do not always make great investments is because the price might reflect an unrealistic set of expectations, such as a the company maintaining it’s profits forever by not facing any competition.
ECONOMIC MARGIN MOMENTUM
Since stocks can be subject to irrational price fluctuations, AFG’s EM Momentum helps generate more consistent portfolio outperformance in short-term increments.
EM Momentum provides clarity on how earnings revisions impact a firms economic profitability levels. In essence EM Momentum translates earnings revisions into economic earnings revisions.
AFG evaluates management teams by their ability to follow wealth creating strategies. For example, wealth creating firms should focus on growing, while firms that destroy wealth should divest and identify core competencies.
These companies on the upper left quadrant were exhibiting wealth destroying qualities for years prior to filing for bankruptcy.
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