Wall Street uses so many different metrics and narratives to justify buy ratings on over 50% of stocks; no wonder investors are confused.
Less than 4% of the 3,300+ stocks we cover get our Very Attractive Rating. More importantly, Very Attractive-rated stocks outperform the S&P 500 by a significant margin in good markets and bad.
We deliver alpha instead of confusion. Our Stock Ratings are easy to understand. Green means good, Red means bad.
While simple on the surface, the work that goes on to derive these ratings is anything but simple. No one works harder to find the truth about profits and valuation than we do. We know of no other firm that can point to published studies by the likes of Harvard Business School, MIT Sloan and Ernst & Young for proof of the superiority of its research.
Now, we have more proof, the Very Attractive Stocks Index, officially known as the Bloomberg New Constructs Ratings VA-1 Index (ticker: BNCVA1T:IND). This index holds the stocks in the Bloomberg US 1000 that get our Very Attractive rating. Thus, we refer to it as the Very Attractive Stocks Index. What matters most is that the index’s outperformance over the short- and long-term is garnering more and more attention. More details below.
The purpose of this report is to share one of the stocks in the Index along with a brief overview of why we think Very Attractive stocks can make good investments. Enjoy this free stock pick. Feel free to share it with friends and family. We are proud of our work and want more people to see it.
Featured Stock from Bloomberg New Constructs Ratings VA-1 Index: Paccar Inc. (PCAR)
Paccar Inc. (PCAR: $89/share) earns an overall Very Attractive rating, driven by Very Attractive ratings in three of the 5 criteria that drive our overall rating. See Figure 1.
Figure 1: Paccar’s Stock Rating
Sources: New Constructs, LLC and company filings
Quality of Earnings Analysis
Paccar earns positive economic earnings and earns an Attractive rating for the Economic vs. Reported Earnings criterion. The company’s top quintile ROIC gets our Very Attractive rating.
We like to see companies grow their economic earnings, and Paccar increased its economic earnings from $916 million in 2014 to $2.4 billion in the TTM. See Figure 2.
Figure 2: Paccar’s Economic Earnings and ROIC: 2014 – TTM
Sources: New Constructs, LLC and company filings
PCAR Is Undervalued
Paccar has a 2-year average FCF (excl. cash) yield between 3% and 10%, which earns an Attractive rating. And, a PEBV lower than 1.1, and a market-implied GAP of less than one year, both of which earn Very Attractive ratings.
Specifically, at its current price of $89/share, PCAR has a price-to-economic book value (PEBV) ratio of 0.9. This ratio means the market expects Paccar’s NOPAT to permanently decline by 10% from 2024 levels. This expectation seems overly pessimistic for a company that has grown NOPAT by 11% compounded annually over the last five and ten years.
The low expectations baked into Paccar’s stock price, along with strong quality of earnings, drive its Very Attractive Overall Stock Rating.
Background on our Stock Ratings
Five criteria drive our stock ratings. We divide those criteria into two categories: quality of earnings and valuation.
Quality of earnings criteria:
- Economic vs. Reported EPS: compares both the level and trend of Economic Earnings, the true cash flows of the business, vs. reported earnings.
- Return on Invested Capital (ROIC): measures how much profit a company generates for every dollar invested in the company.
Valuation criteria:
- 2-year Average Free Cash Flow (excluding cash) Yield: measures the true cash yield of a company.
- Price to Economic Book Value: measures the growth expectations implied by the company’s stock price.
- Market-Implied Growth Appreciation Period (GAP): measures the number of years of future profit growth required to justify the current valuation of the stock.
Stocks that get an overall Very Attractive rating are poised to outperform in any market.
Real-Time Proof of Superior Stock Ratings
The strong outperformance of the Very Attractive Stocks Index proves the superiority of our Stock Ratings. BNCVA1T outperformed the S&P 500 by 80% over the last 5 years, rising 175% compared to the S&P 500 rising 95%. See Figure 3.
Figure 3: Very Attractive-Rated Stocks Strongly Outperform the S&P 500 Over the Last Five Years
Sources: Bloomberg
Note: Past performance is no guarantee of future results.
Wondering how the index has done more recently? See Figure 4 for details on the strong outperformance of the Very Attractive Stocks Index in the first quarter of 2025. BNCVA1T was up 4.6% while the S&P 500 was down 4.6% and outperformed by 9.2%. Not bad.
Figure 3: Very Attractive-Rated Stocks Strongly Outperform the S&P 500 in 1Q2025
Sources: Bloomberg
Note: Past performance is no guarantee of future results.
This article was originally published on May 9, 2025.
Disclosure: Hakan Salt owns PCAR. David Trainer, Kyle Guske II, and Hakan Salt receive no compensation to write about any specific stock, style, or theme.
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