May 29, 2023

AFG Investment Grade

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
AFG Investment Grade

INTRINSIC VALUE

 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. 
Intrinsic Value CAP
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.

Intrinsic Value Deviations


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.


MANAGEMENT QUALITY
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.

Management Strategy

Management Quality

These companies on the upper left quadrant were exhibiting wealth destroying qualities for years prior to filing for bankruptcy.

To learn more about The Applied Finance Group and receive 15 days complimentary access to our suite of research and applications, click here.
 

“In the course of my academic research on equity valuation, and my professional career as a portfolio manager, I have evaluated numerous performance metrics and valuation methodologies. AFG offers an unbeatable combination of Economic Margin Framework and Value Expectations software that is one of the most theoretically sound and practically useful equity valuation platforms available today.”

Bruce Johnson,
University of Iowa Professor of Accounting

 

We find the AFG applications and tools extremely useful. As a small company, it is very difficult to build fully vetted and robust financial models for every stock that peaks our interest. The Value Expectations tool and the Pro-Forma Builder have provided invaluable and relatively efficient assessments of preliminary company valuations. Because these tools are grounded in sound financial principles of economic value creation, we feel very comfortable using the tools to sort through and narrow down our watch lists for further fundamental analysis.”

Michael Hirthler l President & Chief Investment Officer
Jacobi Capital Management AUM Over $500 Million

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