What is the BIF-rating and how can it help you?

In short, the BIF-rating analyzes a company based on various factors. An unique weight is assigned to different fundamental factors. This provides a precise insight into a company’s standing through our fundamental analysis. After that, the BIF-tool examines the current stock price. It assesses if the stock price has the right price when you compare it to the fundamental analysis of the company. After comparing, you can conclude if a company is overvalued or undervalued. The BIF-rating will show you if the stock is a buy opportunity or a stock you dont want in your portfolio.

Do you want to know more about the strategy and the BIF-algorithm?
Then you can download the paper and learn more about the structure of the tool.

How are the scores determined?

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1. Stock Classification

Firstly, stocks are classified using our proprietary classification system, which is based on extensive econometric knowledge. We consider factors such as growth and the type of business to categorize the company into one of our stock classification categories. Subsequently, we use the classification and other company-specific features to determine how we will approach the company in terms of fundamental analysis and valuation (price). Press the button below to read more about our classification system.

2. Fundamentals

Next, we assess the fundamentals of the company. By fundamentals, we mean everything except the company’s stock price. This includes profitability, growth, financial strength, and competitive advantage. As discussed earlier, the determination of the score structure is based on the classification and other company-specific features. This means that the scoring for each company is set up differently. For example, a non-growth company may return value to its shareholders in ways different from a growth company. In the case of a non-growth company, a closer look at stock buybacks or dividends may be necessary. This emphasizes once again the importance of not treating all stocks alike.
*Click to enlarge the image.
*Click to enlarge the image.

3. Price

Finally, we assess the stock price. Investors often seem to forget that the stock price (valuation) and its fundamentals are two distinct aspects. However, even a good company can still be traded at too high a price. Therefore, valuation, alongside fundamentals, is crucial. We value companies using our proprietary valuation models. Again, we differentiate based on classification and/or company-specific features.

What is value investing?

Compared to other strategies that rely on predicting short-term market movements or following popular trends, value investing is focused on understanding the underlying value of a company and buying its stock at a discount to that value. This approach is grounded in the belief that over time, the market will eventually recognize and reflect the true value of the company, leading to higher returns for investors who had the patience and discipline to invest in undervalued companies.

While there are many investment strategies out there, value investing has proven to be a reliable and effective approach to investing for the long term.
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Why do we classify stocks?

There are thousands of stocks, each with its unique characteristics, making it impractical to evaluate them in the same way. Online tools often make the mistake of approaching stocks based on uniform metrics and valuation methods. To gain a better understanding of a stock, extensive research is necessary. To expedite and simplify this process, we classify stocks into different categories using complex algorithms. Each category has its valuation methods and company-specific adjustments to better assess a company’s core growth. This classification is inspired by the principles of value investor Peter Lynch, who achieved an average return of 29.2% over 13 years. Below are the categories with explanations and approach recommendations.
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Fast Growers

Fast Growers are companies that achieve annual profit growth of more than 15%.

These are the stocks with the potential to multiply your money over a period of 10 years. However, most of these Fast Growers may not necessarily be good investments. In a bull market, larger stocks are usually overvalued and extensively covered by analysts. Therefore, it is wise to look at companies with a smaller market capitalization, as they are often less followed by analysts. This can lead to more frequent misjudgments in the market. Also, check whether Fast Growers can sustain their growth and if this growth remains achievable in the future.

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Stalwarts are established companies that achieve annual profit growth of 8% to 15%. 

Normally, you would invest here more defensively when at the right price. The right price is often found when Stalwarts are in overly negative sentiment. However, you cannot expect to triple your money easily, as these are larger established companies. Therefore, aim for a profit of 30% to 50% and do not hold onto them for too long. These stocks are too defensive for the risk you are taking.

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Medium Growers

Medium Growers are companies that achieve annual profit growth of approximately 8% to 15%.

These are companies with a smaller market capitalization and not yet very established or operating in a niche. If they have a sustainable competitive advantage, you can assess them similarly to Stalwarts. Focus on how they can maintain their profit growth. Also, check if they are not wasting money on unnecessary acquisitions. Aim for a profit of 30% to 50% and do not hold onto them for a very long period. These stocks are too defensive for the risk they entail.

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Slow Growers

Slow Growers are companies that annually grow their profits by 0 to 8%.

If they have a strong market position, they can be interesting defensive stocks for your portfolio. However, these stocks are not meant to be held for a long time. You want to look for companies with solid earnings, as for less profit, the growth might not be worth it. Additionally, a healthy balance sheet is crucial.

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No Growers

No Growers are companies that are losing ground. They have experienced declining profits over the past 10 years
(on average).

However, this doesn’t mean they are worthless. When assessing these types of companies, you would follow the so-called “cigar butt” investment approach (a few free puffs). You try to find the very cheap ones. You want to look for a good return to shareholders (in the form of stock buybacks and dividends) because they don’t have a very bright future. Therefore, both free cash flow and a good balance are crucial. These may not be the most exciting stocks for your portfolio, but sometimes you can find real bargains.

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A Cyclical is a company whose revenue and profits rise and fall in a pattern that may or may not be consistent.

In the case of a Cyclical, timing is crucial. When things go well, the stock price rises faster than other stocks. However, when things take a downturn, the stock price seems to fall much more rapidly. When assessing cyclical stocks, you should be able to detect early signs that the company’s cycle is shifting. In that case, you would want to adopt a contrarian approach.

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Turnarounds are companies that are in worse condition (at the time of purchase) than they were previously.

They have had a difficult year or multiple bad years. If these poor results are temporary, Turnarounds can offer great return opportunities. When things improve, the stock price rises rapidly. The approach for Turnarounds is to determine whether the bad years of results are temporary or structural. Ask yourself the following questions: Is it likely that the company’s performance will return to previous levels? And how will the company achieve that?

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