"Rule #1" Companies Making the Grade

I find that MarketGrader.com is a fantastic resource in evaluation of securities, due to its depth of analysis. Few services offer such a comprehensive yet comprehendible report on nearly every publicly traded company on the NYSE and NASDAQ.

Currently, MarketGrader has research reports on 5,719 of these companies. Each of these companies is analyzed from four perspectives: growth, value, profitability, and cash flow. Each of these four areas is then broken into six indicators which vary depending on the company's sector or sub-sector. All companies are given a score based on the research conducted, with the score reflecting the overall strength of a company and its prospects for long-term investment. Scores are the sole indicator of whether MarketGrader gives a buy, hold, or sell recommendation, and scores are determined strictly by numerical analysis and not by any subjective information.

One substantial reason why I believe MarketGrader to be accurate is that they recognize that most companies are not dependable as long-term holds for its owners and worthy of investment. In researching each company on the NYSE and NASDAQ, I came across this same realization. Rule #1 value investors demand that certain statistical criteria be in place in order for a company to be eligible for investment. This includes 10% or greater growth over the previous 1, 3, and 5 year periods on the following: invested capital, sales, earnings per share, return on equity, and cash flow. This criterion is so rigid that less than 1% of these companies have the historical as well as current record of excellence to make the cut.

I ran an experiment to see how MarketGrader would score the select group of "Rule #1" companies. First, it is important to report the breakdown of how MarketGrader has scored all 5,719 companies as a whole. These results speak to my earlier reference of just how strict MarketGrader.com is.

Of the 5,719 companies that MarketGrader currently has analytical reports on:

• 15% score high enough to receive a recommendation of 'buy"
• 15% receive a recommendation of "hold"
• 70% receive a "sell" recommendation

MarketGrader scores of Rule #1 companies:

• 92% receive a "buy" recommendation
• 8% receive a "hold"
• Zero receive a "sell"

Also of note is the following regarding the grading of Rule #1 companies:

• 38% scored in the top 1% of all 5,719 companies analyzed
• 67% scored in the top 5%
• 88% scored in the top 9%
• All scored within the top 22%

Due to the competency of MarketGrader.com, I believe that their grading of Rule #1 companies reinforce the legitimacy of this value investing method. When Rule #1 investors take the next step and determine that not only does this company possess elite fundamentals, but that it also is under the leadership of sound management and is currently undervalued by the market, the potential for great profit is in place.

Christopher Beebe is an advocate of the "Rule #1" method of value investing. He is the proprietor of http://www.wonderfulbusinesses.com and the author of http://www.wonderfulbusinesses.com/blog.