BUY, HOLD, SELL

Companies rated BUY have a consistent growth track record over the short and long term, and the ability to steadily increase earnings. While the system allows companies with high valuations by traditional standards the opportunity to be rated BUYs, their profitability and growth track records must be impeccable. This rewards a business environment that fosters disciplined risk-taking with solid management skills. Nevertheless, MarketGrader’s strict valuation metrics scrutinize every company in absolute terms as well as relative to historical growth rates and to peer valuation averages. BUY rated companies must always adhere to strict profitability standards with a special focus on financial margins and return on equity. The system allows much flexibility for leverage to companies that demonstrate high returns on invested capital with a clear ability to service debt without impairing growth. From the cash flow perspective, BUY rated companies typically demonstrate an ongoing ability to generate enough cash from operations to service debt, organically grow their business through income reinvestment and create shareholder value through consistent returns on invested capital and sustained earnings growth.

Companies rated HOLD by MarketGrader are for the most part in a transition process either on an improving fundamental outlook or in the middle of a deteriorating business environment. It is adequate to assume that the characteristics of these stocks represent a middle ground between BUYs and SELLs.

SELL rated companies for the most part embody characteristics opposite of those rated BUY, including declining growth prospects over the short and long term coupled with inconsistent EPS performance. In many cases the valuation indicators of these stocks are not necessarily as poor as those of some companies with higher overall ratings; this may be attributed to the market having at least partially discounted the company’s meager fundamental record. However, plenty of SELL rated stocks in the MarketGrader system are overvalued, making them very risky investments considering they also tend to have poor profitability indicators, a trademark of highly speculative stocks. MarketGrader SELLs possess poor to mediocre profitability indicators including at times unjustified leverage relative to the stock’s return on equity and cash flow reality. These stocks’ cash flow indicators evidence a struggling business environment and generally weak management policies instituted to maintain the company afloat while better business conditions materialize.

In summary, MarketGrader provides investors a clear and accurate picture about a company’s fundamentals, enabling them to make consistent and educated investment decisions. Furthermore, the standardization system created by MarketGrader’s research allows investors not only to decide which stocks to buy or sell, but also provides them with a reliable tool to track, over time, continued company performance that will affect the future price of the stock.

While it is certainly true that SELL rated stocks often rise in value, they obviously do so not because of strong fundamental performance but because of market momentum, investor speculation, overall industry trends or non-quantifiable factors such as a pharmaceutical company obtaining FDA approval for a new drug or a company being surrounded by takeover rumors, just to mention two examples. This logic does obviously apply as well to BUY rated stocks, which may lose value for some of the reasons listed above and not necessarily based on fundamentals.

The comprehensive and strict nature of MarketGrader’s research helps investors build a portfolio with small risk of significant losses as long as proper diversification and risk tolerance analyses exist. In other words, a portfolio built around MarketGrader BUY ratings with good industry and market capitalization diversification and a consistent rebalancing discipline should typically perform well over prolonged periods of time regardless of the fortunes of some of its individual components.

Top-Down / Bottom-Up Analysis

Our fundamental research process, described above, may be considered a bottom-up analysis where all companies are individually graded based on their financial statements. In addition to this analysis, MarketGrader.com also provides a Market Share Analysis and Industry Analysis. Our Market Share Analysis is based on each company's "revenue" share of their sub-industry. Although not a perfect market share breakdown, this analysis provides a high-level view of whether a company is able to increase its revenue year over year relative to its peers. Our Industry Analysis measures every day the overall performance of the almost 150 sub-industries followed by MarketGrader and ranks them by different time periods. You'll be able to see the average performance of every sub-industry in the last month, three and six months, one and three years and year-to-date. A sub-industry's change in the rankings across different time periods is generally a good indicator of it going in or out of favor with investors, an important part of the investment process.