Stock Ratings

Stock Ratings are given by Investment firms to rank stocks according to various parameters. The most attractive companies are given highest rating.

Ratings usually rank stocks according to a Style: Value, Growth, Momentum. Other Ratings include Quality (Financial Safety) or Leadership (companies that have an edge over their competitors), Timeliness (stocks that are expected to outperform in the short term. In fact, a mix of Growth/Momentum).

  • Growth/Momentum/Timeliness: companies are ranked according to a mix of Earnings Growth Momentum, Positive Earnings Surprise and Price Relative Strength. The stocks with highest rank are expected to outperform in the Short/Medium term (next 1 month to 1 year).
    Examples: Value Line, Zacks Rank,

  • Value: companies are ranked according to a discount to intrinsic value estimate. The ranking includes a risk measure and it is usually more difficult for risky companies to get a high rank.
    Examples: MSN Stock Scouter Valuation, Morningstar Rating, VectorVest Value Rank,

  • Quality/Safety: companies are ranked according to a mix of Financial Strength (e.g. Debt, Bond Rating) and Share Price Stability
    Examples: Value Line Safety, VectorVest Safety Rank,

  • Leadership: companies are ranked according to one or several of the following factors: Revenue, Cash Flow, ROE (Return On Equity), ROA (Return On Assets), Profit Margin,
    Examples: Morningstar Economic Moat,

  • Overall Stock Rating: most investment firms also provide an overall Stock Rating combining several of the above indicators. Examples:

    • MSN Stock Scouter Rating: combines Growth, Value and Timing (Positive Price Trend)


    • Standard&Poor STARS (STock Appreciation Ranking System): combines Growth, Value and Timing (Positive Price Trend)


    • VectorVest VST: combines Value, Safety (more predictable earnings and low share price volatility) and Timing (Positive Price Trend)

Benefits of investing with Stock Ratings Go back to Top

  • filter the very best companies according to your investment strategy in 1 single criterion.

  • come from backtesting where stocks with best rating have proven to consistently beat the market.

Stock Ratings as Investing Universe Go back to Top

In Stock Screening, we saw that a successful stock screening strategy should start with a reduced Investing Universe.

Stock Ratings are excellent as Investing Universes because of the above benefits.

Many simple Mechanical Stock Picking strategies can be implemented with a Stock Rating as sole criterion. You can then either buy all stocks or keep the Top ones with a final Ranking.

Examples:
  • Mechanical Portfolio 1:
    - Screen for stocks with Zacks Rank= 1
    - Buy 20 lowest Price/Earning ratio PE

  • Mechanical Portfolio 2:
    - Screen for stocks with Valueline Timeliness=1
    - Buy 25 highest Relative Strength

If you implement such strategy, Zacks recommends to maintain sector weighting in your final portfolio. This basically means that you rank within sector/industry. This is less important if your holding period is short (Momentum strategies) but as your holding period increases, sector diversification becomes important.

Examples:

In the above Mechanical Portfolio 1, let's assume that 23 out of the 200 stocks with Zacks Rank= 1 are in the healthcare sector.

Ideally your portfolio with 20 stocks with low PE should include 23*(20/200)=2 healthcare stocks.

To get the number of stocks in each sector, you perform this calculation for every sector.

Sector #Stocks with Zacks Rank 1 #Stocks in Mechanical Portfolio
Financials 14 14*20/200 = 1.4 rounded to 1
Healthcare 23 23*20/200 = 2.3 rounded to 2
Consumer Staples 17 17*20/200 = 1.7 rounded to 2
Technology 32 32*20/200 = 3.2 rounded to 3
Utilities 2 2*20/200 = 0.2 rounded to 0
Consumer Discretionary 46 46*20/200 = 4.6 rounded to 5
Energy 15 15*20/200 = 1.5 rounded to 2
Materials 27 26*20/200 = 2.7 rounded to 3
Services 24 25*20/200 = 2.4 rounded to 2
Totals 200 20

You now have a diversified portfolio of 20 stocks with Zacks Rank 1 and Low PE.


For Mechanical Portfolio 2 which uses Relative Strength, if your holding period is 1 year, then you may maintain sector balance but if you rebalance every month or quarter, then you can ignore sector balance.

Stock Ratings Conclusion Go back to Top

Stock Ratings are ideal as Investing Universes in any stock screening strategy.

While most investment firms charge a fee to access their Ratings, some are accessible for free: notably MSN Stock Scouter Ratings accessible through MSN Deluxe Stock Screener.

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