I developed a 9 point system to evaluate companies that I either own stock in or am considering for an investment. This system assigns 3 points each to the ratings firms in an attempt to provide some balance. The metrics and point systems are as follows:
S&P credit rating: a point is given for a rating of A, 2 points for AA, and 3 points for AAA (plus or minus are ignored).
Morningstar wide moat earns 3 points, narrow moat 1 point.
ValueLine safety rating of 1 (safest) earns 3 points, a rating of 2 gets 2 points, and a 3 gets 1 point.
I developed this rating system to help identify higher quality companies/stocks. I will invest in companies with lower ratings if they have high yields or are expected to raise earnings and cash flow significantly in the next couple of years. I will not invest in any company with less than a BBB- credit rating or a VL safety rating less than 3, but a moat is not required. A moat is preferable, however, as it limits competition and increases the likelihood of long term earnings potential.
The highest rated company in our portfolio is JNJ which gets 9 points. The AAA credit rating gets 3 points, the wide moat gets 3 points, and VL safety rating of 1 earns another 3 points. MSFT is the only other company that rates 9 points. No other companies have AAA credit ratings and, therefore, cannot be rated as highly. Companies in our portfolio that get 8 points are CL, GOOGL, MMM, NKE, ORCL, PFE, PG and WMT.
I also hold seven stocks with scores of three or less. KHC and KMI were included in the portfolio before I developed this system. This ranking is tough on certain sectors, such as REITs, where it is tough to develop a moat and credit ratings are typically BBB+ or lower. It is also tough on newer companies, particularly if they are not rated by either Morningstar of ValueLine. O and VTR are REITS and AGR is an electric utility with 2 ratings that are included for the higher yields. CELG is a fast growing biotech, and BAC is expected to grow earnings as the banks continue to recover and interest rates raise.
Current investments (updated October 9, 2017) and their point totals are shown below:
|Symbol||Name||S&P credit||M* Moat||VL Safety||Credit
|BAC||Bank of America||BBB+||Narrow||3||0||1||1||2|
|HD||The Home Depot, Inc.||A||Wide||1||1||3||3||7|
|JNJ||Johnson & Johnson||AAA||Wide||1||3||3||3||9|
|LOW||Lowe's Companies, Inc.||A-||Wide||2||1||3||2||6|
|PG||Procter & Gamble||AA-||Wide||1||2||3
FB (which is not in the portfolio, but is a good example) earns 3 points for credit rating even though S&P has not rated it. This is because FB received a Value Line financial rating of A+ (highest) and has no debt, and what could be better than no debt?
For those of you who remember reading this when it was first published, I did eliminate the Morningstar management stewardship rating to concentrate on their moat rating. To be honest, some of the stewardship ratings didn't make sense to me, but at any rate, I feel that the moat is the most important thing that Morningstar measures. So, now credit rating, moat, and safety all get an equal 3 possible points.
Anyway, that's it. Maybe it will give you something to consider as you continue your investing journey. Please let me know if you have any questions. Thanks!
Disclosure: I am/we are long ALL STOCKS LISTED.