Investment quality
The most in ranks divided investment grade rated the suitability of a security , as capital investment to serve. The investment quality of bonds is assessed by rating agencies with the help of company and issue ratings . The investment quality of stocks is assessed by analysts on the basis of fundamental analysis or on the basis of technical analysis .
Investment quality in bonds
The credit rating of the issuing company ( issuer ) forms the basis for assessing the investment quality of bonds . The rating uses letter codes from “AAA” (highest creditworthiness ) to “D” ( insolvency ) to assess the probability that the issuing company will meet its payment obligations.
The rating of the issued bonds ( issue ) is derived from the company rating . Bonds with a rating of BBB– ( Fitch and Standard & Poor’s ) or Baa3 ( Moody’s ) or higher by the rating agencies receive the rating of investment quality. Bonds assigned a rating lower than BBB- / Baa3 are of " speculative quality".
The distinction between “investment quality” and “speculative quality” is particularly important for institutional investors such as pension funds or insurance companies, as they are often encouraged to only invest in bonds with investment quality.
Investment quality in stocks
The investment quality of stocks does not relate to the company's creditworthiness , but to the expected price development . The creditworthiness assessment of the issuing company can be included indirectly in the assessment, but it plays a subordinate role compared to the expected price development.
Short-term investment quality
On the basis of price data, fundamental data, and company and economic reports, analysts make recommendations as to whether a share is suitable for buying. The investment quality is usually classified in the three categories “Buy”, “Hold” and “Sell”.
Analyst recommendations often react at short notice to events such as economic reports , quarterly reports from stock corporations or to changes in the rating of the issuing company. Long-term influencing factors such as B. the dividend and price history of a share play a subordinate role in analyst recommendations. Accordingly, the price targets for a share stated by analysts are mostly short-term and therefore not suitable as a guide for long-term investments .
Medium-term investment quality
On the basis of the fundamental data of a stock corporation ( profit and loss account , balance sheet ) as well as on the basis of assessments of future investment activity and competitiveness , financial information and analysis companies such as B. Morningstar Inc . made an estimate of the “ fair value ” of a share. The fair value is compared with the current share price (= market value ). The medium-term investment quality of a share is derived from the difference between fair value and market value.
If the fair value is significantly higher than the market value, a share is assigned a high medium-term investment quality, since it is assumed that the current price will rise significantly in the medium-term and will approach the fair value.
If the fair value is significantly lower than the market value, a share is considered to be of poor investment quality, as it is assumed that the current price will fall significantly in the medium term, thereby approaching the fair value.
The problem with this type of stock rating is estimates of future investment activity and analyzes of a company's competitiveness. In both cases it is a question of assumptions that are oriented towards the future, which means that they can also turn out differently than forecast. If the forecasts do not come true, the assessment of the investment quality must be corrected accordingly. Analysis companies such as Morningstar Inc. counter this problem by having their stock ratings recalculated every trading day at market close.
Long-term investment quality
The assessment of the long-term investment quality was developed by boerse.de on the basis of the technical analysis. It is assumed that all relevant information including analyst assessments and fundamental data is already contained in the long-term price history of a share. Based on the share price of the last 10 years, the key figures "geoPAK10" (= average annual price gain in the past 10 years), "Profit Constancy" (= frequency of positive price returns in different scenarios) and "Loss Ratio" (= frequency of exchange rate losses in the past 10 years).
These three key figures lead to a classification of the investment quality in 15 levels, ranging from "very good investment quality" to "very poor investment quality".
The 100 stocks around the world with the best long-term key figures are given the status of “Champions Share”. These stocks have seen consistently high price gains for at least ten years. At the same time, these stocks have comparatively few periods of price losses.
However, stocks that have been on the market for less than 10 years cannot be valued using this valuation method. It should also be taken into account that the technical analysis is carried out retrospectively. The result of the technical analysis can be an indication of the future price development, but it does not offer any security. Similar to the medium-term analysis, the classification of the long-term investment quality must be checked at regular intervals.
The advantage compared to short- and medium-term investment quality is that no subjective analyst assessments are included when determining the long-term investment quality, but only the 10-year price trend and the resulting key figures are considered.
Company ratings as an additional indicator of investment quality in stocks
Company ratings are only used as an indicator of investment quality for bonds . It is not possible to use company ratings to obtain indicators for the future price development of a stock. The development of the share prices of companies with a speculative rating may well be better than the price development of companies with an investment quality rating.
So z. For example, the US automaker Tesla is rated as speculative by the rating agencies with "B3", but the price of Tesla shares increased more than tenfold between the beginning of 2011 and the end of 2017. Even a long-established company like US Steel , which increased its share price sixfold between the beginning of 2016 and the end of 2017, is only rated “B +” (speculative) by the rating agencies.
Nevertheless, with long-term equity investments it can make sense to use the current company rating as an additional safeguard in addition to the long-term equity rating. The company rating also reflects, among other things, a company's balance sheet strength, which can prove to be price-sensitive in difficult economic times or when credit conditions are difficult .
Individual evidence
- ↑ Definition of investment quality at trading-house.net, accessed on April 24, 2018
- ↑ Definition Analyst at finanztreff.de, accessed on April 24, 2018
- ↑ Company ratings as a yardstick for investment quality creditreform.de, accessed on April 24, 2018
- ↑ Information on the company rating at Creditreform (PDF), accessed on April 24, 2018
- ↑ Information on the company rating at Fitch (PDF), accessed on April 24, 2018
- ↑ Issue ratings derived from the issuer rating www.ehrg.de, accessed on April 24, 2018
- ↑ Criticism of short-term share ratings by analysts on www.fool.de, accessed on April 24, 2018
- ↑ Overview of Morningstar's share rating at www.morningstar.de, accessed on April 24, 2018
- ^ Definition of Champions shares at www.boerse.de, accessed on April 24, 2018
- ↑ Rating Tesla in March 2018, accessed on April 24, 2018
- ^ Tesla share price on google.de, accessed on April 24, 2018
- ↑ US Steel share price on google.de, accessed on April 24, 2018
- ↑ Rating US Steel in March 2018, accessed on April 24, 2018
- ↑ On the Influence of Bond Ratings on Share Prices on finance.zacks.com, accessed April 24, 2018