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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.

FinancialsCompany NameFinancial Strength Rating3-yr Avg Return
Strong FinancialsDollar General Corp90.432%
Strong FinancialsBarrick Gold Corp98.524%
Strong FinancialsIntel Corp91.52%
Strong FinancialsKirkland Lake Gold Ltd97.633%
Strong FinancialsMercury General Corp98.114%
Strong FinancialsNewmont Corp98.226%
Strong FinancialsProgressive Corp95.920%
Strong FinancialsSouthern Copper Corp95.616%
Strong FinancialsUnitedHealth Group Inc93.520%
Weak FinancialsAlaska Air Group Inc48.26%
Weak FinancialsBank of America Corp42.315%
Weak FinancialsChevron Corp40.8-1%
Weak FinancialsGeneral Electric Co41.31%
Weak FinancialsIntuitive Surgical Inc54.820%
Weak FinancialsPalo Alto Networks Inc35.220%
Weak FinancialsPhillips 6658.2-6%
Weak FinancialsRaytheon Technologies Corp56.32%
Weak FinancialsSplunk Inc30.72%
Weak FinancialsTruist Financial Corp58.48%
Weak FinancialsWells Fargo & Co58.2-2%
Weak FinancialsExxon Mobil Corp58.3-5%

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:

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