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User Guide: How Investments are Picked

RFR User Guide

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The Roen Financial Report uses proprietary methods to pick what we feel are the best-positioned alternative energy investments. These methods are used to construct the Paradigm Portfolio, pick Top Pure Play stocks and rank alternative energy mutual funds.
 
 
 
 

Paradigm Portfolio

Ranking Companies

The Roen Financial Report sifts through multiple criteria for each of the +/-250 alternative energy companies that we track. This rigorous screening process creates a clear picture of which companies emerge as the best choice for investors. We use over 60 separate screens to see which stocks are posting the best numbers. These screens vary widely in their function, filtering out companies with good cash flow, improved earnings estimates, price momentum and the like.

The number of screens that a stock passes is then combined with other important ranking criteria. These include which companies are highly recommended by other analysts, debt levels, media touts, industry outlook and fair value. All these ratings are then coalesced to see which companies rise to the top with a balance of high ratings in all categories.

All information in the ranking system is updated and reviewed monthly. Stocks are only added or removed from the paradigm portfolio when enough has modified about a stock to necessitate a change in its status. As a result, changes to the portfolio may not occur every month.

Returns

Returns for the paradigm portfolio are calculated on a hypothetical basis, and do not track an actual invested portfolio. The principle assumption is that the hypothetical portfolio is fully invested at all times, with no cash position. All stocks in the portfolio were equally weighted when the portfolio was initiated on January 1, 2013. If the Roen Financial Report indicates that a stock should be removed from the portfolio, the hypothetical proceeds from that “sell” are equally redistributed to every stock that remains. At the same time, each stock is rebalanced so that all stocks are equally weighted again. This means that if a stock has appreciated in price, that hypothetical gain is removed and distributed to the other stocks. Similarly, if there was a loss on a stock, it gets a larger amount of the redistribution in order to make all holdings equally weighted.

When a stock is added to the portfolio, a comparable rebalancing process is calculated. Hypothetical gains are taken from stocks that have advanced and are redistributed so that the added stocks, and all other holdings, are at an equal dollar value.

This methodology of calculating returns is similar to the approach used by the widely followed and highly regarded Hulbert Financial Digest. It is the fairest method to simulate how money fully invested in the paradigm portfolio would return.

To simplify calculations, dividends, commissions and taxes are not accounted for in return numbers. Stock prices are back adjusted for splits when they occur.
 

Top Pure Play

Top pure play stocks are picked using the same criteria as outlined above for the paradigm portfolio. These criteria are applied to only pure play companies in order to see which rank the highest on the balance of criteria. Top pure play ranks are updated monthly.

Top pure play companies are not maintained as a hypothetical portfolio, but are a list of what we feel are the best alternative energy companies for investors interested in stocks working purely in alternative energy.
 

Mutual Funds and ETFs

Each month, alternative energy mutual funds and ETFs are reviewed. The objective is to update all fund ranks by using the most current data.

First, securities that each of the funds are invested in are updated and reviewed. Each underlying security in the fund is categorized into the six alternative energy industries (energy efficiency, environmental, fuel alternatives, smart grid, solar, wind), so that an assessment can be made as to what industry or industries the fund is focused on.

Each stock that the fund holds is also evaluated to determine its fair value level. These holdings are then averaged out to give an indication of whether the fund as a whole is overvalued, undervalued, or at fair value. Securities in the fund that the Roen Financial Report does not have a fair value calculated for are considered to be trading at fair value.

Data for each fund are then evaluated against all other alternative energy funds, producing an apples-to-apples comparison. This is done to determine which funds have the best statistics and features. These criteria include:

Morningstar® Rating

Returns

Risk

Price/ Sales

Forward Price/ Earnings

Trailing Price/ Earnings

Tax Cost Ratio

Potential Cap Gains Exposure

Expense Ratio

Management Fees

Alpha

Turnover Ratio

Fund Size

Fund Manager Tenure

 

So for example, expense ratios for alternative energy mutual funds range widely, from about 1% to over 2%. When the expense ratios of all funds are compared, those in the lowest quintile get a rank 1 in that category, the next lowest quintile gets a rank 2, etc., down to a Rank 5.

The ranks for each criterion are weighted by importance, and then compiled to get an overall rank for each fund. Funds that rank best overall on all the criteria are given a Rank 1. Funds that end up on the bottom relative to other funds are given a Rank 5.

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