Is the 3805 Magic Formula of American Finance Trust, Inc. ($AFIN$) a Positive Signal?

American Finance Trust, Inc. ($AFIN$) has a current MF Rank of 3805. Developed by hedge fund manager Joel Greenblatt, the intention of the formula is to spot high quality companies that are trading at an attractive price. The formula uses ROIC and earnings yield ratios to find quality, undervalued stocks. In general, companies with the lowest combined rank may be the higher quality picks.

In their 2008 paper, professors Cooper, Gulen and Schill provided evidence that a firm’s assets growth rates are strong predictors of future abnormal returns.

“The findings suggest that corporate events associated with asset expansion (i.e., acquisitions, public equity offerings, public debt offerings, and bank loan initiations) tend to be followed by periods of abnormally low returns, whereas events associated with asset contraction (i.e., spin-offs, share repurchases, debt prepayments, and dividend initiations) tend to be followed by periods of abnormally high returns.” – Cooper, Gulen & Shill in Asset Growth and the Cross-Section of Stock Returns. In a study on US data during the course 1967-2007, they find that:

– A hedge portfolio rebalanced annually that is long (short) the stocks of companies with the lowest (highest) percentage growth in total assets over the previous 12 months generates an average annual return of 22%.
– This asset growth effect is stronger for small capitalization stocks, but is still substantial for large capitalization stocks.
– The effect is strongest in the month of January.
– Asset growth rate retains large explanatory power for future stock returns after accounting for firm size, book-to-market ratio and momentum. In fact the asset growth effect is at least as powerful in explaining returns as these other widely used factors.

We calculate asset growth as follows:

Total Asset Growth = (Total AssetsTotal Assets y-1) − 1. American Finance Trust, Inc. (AFIN) has a total asset growth number of -0.011339.

Net Debt to Market Cap

This ratio gives a sense of how much debt a firm has relative to its market value. Companies with high debt levels compared to their peers can be volatile. We calculate it as follows:

Net Debt to Market Cap = (Total Debt−Cash and ST Investments) / Market Cap

American Finance Trust, Inc. (AFIN) has a net debt to market cap ratio of 0.060489.

External Financing Ratio

This factor was introduced by Richard Tortoriello, a senior quantitative analyist for S&P Capital IQ. He authored a book on quantitative analysis: Quantitative Strategies for Achieving Alpha (2009, McGraw Hill). In this book, he identified the External Financing Ratio as a factor that is very good at predicting investment underperformance.

Formula:

External finance ratio = (Total Assets−Total Assets y-1−Cash Flow from Operations) / Total Assets

American Finance Trust, Inc. (AFIN) has an external finance ratio of -0.042548.

Altman Z Score

American Finance Trust, Inc. (AFIN) has an Altman Z score of 1.216906. The Z-Score for predicting bankruptcy was published in 1968 by Edward I. Altman, who was assistant professor of finance at New York University at that time. It measures the financial health of a firm based on a set of income and balance sheet values. The Altman Z-Score predicts the probability that a firm will go bankrupt within 2 years. In its initial test, the Altman Z-Score was found to be 72% accurate in predicting bankruptcy two years before the event. In a series of subsequent tests, the model was found to be approximately 80%–90% accurate in predicting bankruptcy one year before the event

Atman built the model by applying the statistical method of discriminant analysis to a dataset of publicly held manufacturers. Since then he has published new versions based on other datasets for private manufacturing (Z’-Score), non-manufacturing, service companies and companies in emerging markets. (Z”-Score)

Please also note that the original dataset used was quite small and consisted of only 66 firms of which half filed for bankruptcy. All companies were manufacturers and small firms (total assets less than $1m) were removed.

Book to market

BTM is a comparison of a firm’s net asset value per share to its equity price. This is a useful gizmo to assist determine how the market prices a firm relative to its actual worth. A ratio greater than one signals an undervalued firm, while a ratio less than one means a firm is overvalued. Value managers seek out companies with high BTMs for their portfolios.

Formula:

Book-to-Market Ratio = Common Shareholders Equity Divided by Market Cap.

Piotroski F-Score

The Piotroski F-Score is a scoring system between 1-9 that determines a firm’s financial strength. The score helps determine if a firm’s stock is valuable or not. The Piotroski F-Score of American Finance Trust, Inc. (AFIN) is 4. A score of nine signals a high value stock, while a score of one signals a low value stock. The score is determined by the return on assets (ROA), Cash flow return on assets (CFROA), change in return of assets, and quality of earnings. It is also determined by a change in gearing or leverage, liquidity, and change in shares in issue. The score is also determined by change in gross margin and change in asset turnover.

Return on Assets

There are many different tools to determine whether a firm is profitable or not. One of the most prime ratios is the “Return on Assets” (aka ROA). This score signals how profitable a firm is relative to its total assets. The Return on Assets for American Finance Trust, Inc. (AFIN) is -0.013107. This number is determined by dividing net income after tax by the firm’s total assets. A firm that manages their assets well will have a higher return, while a firm that manages their assets poorly will have a lower return.

Leave a Reply

Your email address will not be published. Required fields are marked *

*