New Ratings Idea for CAPS
Recently, we tested a new ratings idea for CAPS. The idea is that it would be valuable to rate companies by categories in addition to future price performance. As we do our research, many of us screen for companies that appear to be undervalued, or exhibiting strong growth... What is it that distinguishes these candidate companies from one another? For many of us, it's understanding the quality of a business and its people... So, we identified key factors that we think distinguish great companies. We rolled these factors into we might call the "5-Ps," People, Profitability, Position, Potential, and Purpose.
I tested the 5-P ratings with an email survey to anyone who has rated one of the ten most rated stocks on CAPS: Apple, Altria Group, Cisco, Johnson & Johnson, Google, Ford, Microsoft, General Electric, Bank of America, and Citigroup. You can read my article on the results here: 5 Secrets of Investing Greatness.
Below is a summary of the results. Each rating category is measured on a scale of one to five, with five as the most positive rating:
Key No. 1: People
Specifially, we asked members to rate companies on Shareholder-Friendliness, Management, and the CEO.
Key No. 2: Profitablity
Some of the indicators we feel are important include whether a company has more cash than debt. We look for companies that generate consistent revenue growth and deploy capital effectively, with return on equity greater than 10%.
Key No. 3: Potential
Here we asked members where the business can go in years to come. Is the company at a relatively early stage in its maturity cycle? If the company's products are at a late stage in their maturity cycle, are they the best offerings available? Can you envision multiple futures for this company? Does this company benefit from economies of scale?
Key No. 4: Position
We asked members to evaluate competitive advantage--e.g. companies with cost advantages that can't be replicated, or companies that convey social status in the use of their products or services.
Key No. 5: Purpose
It's critical for a business to be surrounded by enthusiasm and to serve a larger mission. Ask yourself the question, "Would the world be worse off if this company didn't exist?"
Finally, here's how companies rank when we aggregate their scores across each of the 5-P Categories (People, Profitability, Potential, Position, and Purpose):