FA Alpha 50

The Simple Framework that Unlocks Massive Returns

Valens Research’s powerful factor-based stock-picking model has proven to outperform the market significantly. The Russell 3000 has impressively gained a 400% return over the last 20 years. The FA Alpha 50 stocks have nearly DOUBLED that.

These factors that can help investors generate massive returns are just like the factors identified by leaders such as Eugene Fama and Kenneth French thirty years ago. High quality, cheap stocks.

But with better data.

Generating alpha with these factors is no longer possible using traditional accounting data. GAAP and IFRS mask the real quality, and the real value of the stocks investors are looking at.

Using Uniform Adjusted Financial Reporting Standards (UAFRS), we can get back to the roots of quality investing.

The below chart tracks the performance of the UAFRS-driven FA Alpha 50 portfolio. As you can see, this portfolio has generated sizable alpha. Investors won’t see returns near these levels just by investing in the S&P 500 or Dow Jones.

For years, the investing greats have been competing with one another to drive outperformance. One winning strategy many funds employ is factor investing. This methodology has grown in popularity as quant funds have become more successful in the past few years.

Fama and French are credited with bringing factor investing to the common lexicon, starting with factors such as size and valuation to model performance, eventually moving to quality, investment, and other drivers. Today, investors around the world are using thousands of factors in the search for alpha.

But thanks to the numerous distortions inherent in GAAP and IFRS metrics, even the strongest factors might miss the mark, due to the garbage-in, garbage-out nature of as-reported analysis.

At Valens, we know how little asset managers take stock in GAAP metrics. This is because nine out of the top ten money managers in the world use Uniform data to drive their analysis.

Once the veil of as-reported accounting is lifted, the application of three intuitive factors leads to market outperformance. When UAFRS is applied, even the simplest factors can drive alpha.

Combining UAFRS-based Quality, Growth, and Valuation factors, factors that have been around for years, can create outperformance.

Quality is measured by UAFRS-based Return on Assets (ROA). Firms with a higher ROA are able to drive better margins, asset turns, or a combination of the two, outperforming competitors.

Growth is measured by UAFRS-based asset growth. Businesses reinvesting in themselves.

And finally, Value is measured by simply looking for companies with low Uniform price to earnings (P/E) ratios.

Firms who score well in all of these categories are strong, growing names the market has overlooked, making them ripe for future outperformance.

And this outperformance is measurable. Over the past twenty years, investing purely with these UAFRS factors has generated an 11.7% annual return, compared to the Russell 3000’s return of only 8.2%.

Now, Valens is selling the top fifty quality, growth, and valuation names in one report, for the low price of $99 a year. Follow in the footsteps of Blackrock, Vanguard, Fidelity, and more by investing today.

This means each month, readers get fifty names just like Premier, Inc. (PINC)…

Premier operates in the health services industry, focusing on the integration of data and analytics, as well as supply chain and other consulting services.

If investors viewed Premier through the lens of as-reported accounting, they would write off the firm’s performance.

Specifically, the firm’s as-reported return on asset (ROA) levels have fluttered around corporate averages, teetering around 10% to 14% levels over the past three years.

In reality, as you can see in the below chart, Premier has been able to generate robust ROA at least ten times greater than GAAP returns.

After determining the outstanding quality of the firm, we can then turn to its growth. The reason ROA levels have dropped off significantly is because Premier is investing heavily into its business.

And yet, GAAP accounting has failed to capture this. As-reported asset growth figures were negative in 2017, before expanding slightly into the 11% to 15% range since 2019. However, Uniform asset growth has been consistently strong. Specifically, Uniform asset growth has increased from 14% levels in 2018 to 49% levels in 2020.

Finally, now that we can see Premier’s hidden strength, let us unpack valuations.

The market is pricing Premier at a reasonable discount, with an as-reported P/E ranging from 12x to 14x over the past three years. However, on a Uniform basis, the company is even cheaper than it appears. Specifically, Uniform P/E levels have faded from 11x in 2018 to 8x in 2020.

This means investors are getting an incredibly high quality, high growth, CHEAP company, that would never have been found by looking at the as-reported metrics.

And again, this is just one example.

Another would be Renewable Energy Group (REGI). Renewable Energy Group engages in the production and trade of biofuel and renewable chemicals.

Despite having muted ROA levels in 2017, serious distortions become apparent in 2018 and beyond. Specifically, as-reported ROA levels have ranged from 18% to 19% levels since 2018. While these figures are robust, it does not do its justice on the true quality of Renewable Energy Group.

Uniform ROA levels were actually 29% in 2018 and 31% in 2019. This is more than 1.5x the as-reported metrics in their respective year.

See for yourself below.

Moving into the asset growth of the firm, there are slight differences amongst as-reported and Uniform accounting metrics. While as-reported metrics are slightly higher than the Uniform metrics, they are roughly in line with each other. Additionally, despite the wider gap in 2019, Uniform asset growth still shows a robust 33% rate.

Finally, the valuation of the company. Of the three factors, the valuation component may be the most compelling for this name.

Over the past three years, the market has been pricing in Renewable Energy Group at 10x to 15x multiples relative to earnings.

However, the Uniform P/E ratio highlights a different story; the firm is trading well below what as-reported metrics show. Before expanding to 9x in 2019, Uniform P/E was trading at 3x levels from 2017 to 2018.

By viewing Renewable Energy Group through a Uniform Accounting lens, investors are better able to recognize the high quality, high growth, and inexpensive company. This would never have been found by looking at the as-reported metrics.

Our final example of a stellar FA Alpha 50 name is AbbVie (ABBV). AbbVie is a research-based biopharmaceutical firm that develops drugs focused on treating blood cancers and autoimmune diseases.

If investors viewed this firm based on its as-reported metrics, they would never understand it would make a top 50 portfolio.

For example, as-reported ROA levels have ranged from 9% to 12% over the past three years, indicating the firm is generating returns near or below the corporate average. This makes it seem like AbbVie is a stereotypical firm.

In reality, AbbVie is generating robust returns. The company has been able to improve returns well above corporate averages. Over the past three years, Uniform ROA has grown from 30% to 45%.

Over the past three years, as-reported asset growth has vacillated between growing at 45% and shrinking by almost 20%. However, Uniform asset growth shows consistent growth, a good signal for a large pharmaceutical firm.

Diving deeper into the valuation of AbbVie, investors can see the firm trades at cheap valuations for such robust returns.

The Uniform P/E ratio shows despite slightly climbing valuations, AbbVie is still cheap 12x, well below corporate averages of 20x. While As-reported P/E shows a company only getting cheaper, Uniform Accounting shows investors are slowly coming around to the strength of the name.

Investors are blinded to AbbVie’s high quality, growth, and cheap valuation solely because they are viewing the wrong data. Instead of trusting the as-reported metrics of this company, investors should be asking to see the Uniform Accounting data.

These are just three examples of the fifty high quality and inexpensive names on the FA Alpha 50.

With the portfolio updated every quarter, you can subscribe today to receive the 50 names identified by our Uniform powered factors today.

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