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The flowchart below outlines The Applied Finance Group’s (AFG's) custom screening process which takes into account several factors to screen on as well as provides step by step process to end up with the highest quality investment ideas. In Step 1 & 2 of AFG’s custom screening process, we identified companies that were trading at a discount to their intrinsic value as well as expected to improve their economic profitability.

Today we will keep the criteria of looking for cheap companies expected to improve their economic profitability (Economic Margins) the same, however this time we will eliminate companies with management teams who are unable to create wealth for their shareholders using AFG’s Management Quality variable.

One of the key variables AFG uses when identifying potential investment opportunities is the Management Quality Score, which provides insight into management’s ability to create or destroy shareholders wealth.

Management Quality Score Insights:

  • Measures a company’s Economic Margin (EM+1) and LFY Asset Growth.
  • Companies that have positive EMs should grow their business while firms with negative EMs should focus on profitability and earn the right to grow.
  • Unbiased quantitative way to analyze a company
  • Holds management teams accountable for unprofitable growth

Management Quality - Evaluating Management:

  • Assess companies’ Economic Margins.
  • Evaluate the ability of companies to sustain Economic Margins based on historical performance.
  • Build out companies’ future cash flows to better evaluate expected future performance relative to their peer group.
  • Look at companies’ investment prospects, and review how they are growing or shrinking their business.

A company with a wealth creating strategy has a positive EM + 1 and is growing its asset base while a wealth-destroying company has a negative EM + 1 and is continuing to grow its assets.

AFG recommends avoiding companies with management teams that implement a wealth-destroying strategy, as these companies have proven to be more likely to underperform their chosen benchmarks than those companies following a wealth creating strategy.

In the next few days, ValueExpectations.com will go through each step and combine multiple steps and display some of the results of each screen until we get through the entire process and end up with high quality investment ideas that we will provide to readers.

Below are a few companies that met the criteria of AFG’s Custom Screening Process Step #3

AFG Screen Criteria

1) Attractive valuation

2) Expected to improve economic profitability

3) Management team that creates wealth

Ticker Name Sector Valuation Expected Change In EMs Management Quality

(NYSE:BMY) BRISTOL-MYERS SQUIBB CO Health Attractive Positive Good
(NYSE:CF)
CF INDUSTRIES HOLDINGS Basic Material Attractive Positive Good
(NYSE:CLF)
CLIFFS NATURAL RESOURCES Energy and Extraction Attractive Positive Good
(NYSE:CVH)
COVENTRY HEALTH CARE Financials Attractive Positive Good
(NYSE:CVX)
CHEVRON Energy and Extraction Attractive Positive Good
(NYSE:FCX)
FREEPORT-MCMORAN B Basic Material Attractive Positive Good
(NYSE:GLW)
CORNING Basic Material Attractive Positive Good
Source: Seven Companies Likely to Improve Economic Margins