Part 1 described the basic concepts of stock ranking systems and provided some examples. Now we discuss the types of systems you can access.
All the approaches described in Part 1 are quantitative. Judgment is used to create an algorithm which is implemented in a mechanical, repeatable fashion. Only measurable variables or those which can be quantified are considered.
Perhaps the best known quantitative systems are Valueline and Zachs. They are proprietary systems but the stock screeners associated with these systems give you access to these stock ranking values.
Most of us are familiar with the role of the stock analyst at an investment firm. Their job is to study a company's financials, management of the company, strength of the product line and market, and produce a recommendation about the worth of the company as an investment. This is an example of a qualitative rating.
Notice that many of the variables being evaluated are not quantifiable. This would therefore be based on the judgment of the stock analyst.
One of the best known qualitative stock rating systems is the Standard and Poors' rating system - STARS (STock Appreciation Rating System). If you use an online broker, you will probably be able to access an S&P report of a company you are considering. Many of these S&P company reports will have the STARS (1 to 5) within the report along with the analysis and target price.
The choice is yours.
The last approach is similar to one mentioned by Mark Hulbert in a MarketWatch post dated October 29, 2002.
Hulbert had tracked both the quantitative approach of Valueline and the qualitative approach of STARS from 1989 to 2002. He had high praise for both but pointed out that Valueline top-ranked stocks had outperformed top rated STARS stocks by 3% per year over that period. Although he had not backtested the idea, he mentioned that it might be profitable to buy only stocks that were top ranked by both systems.
Using a stock ranking system to enhance your investing performance seems like a no-brainer but you need to do some research and/or back-testing before jumping in.
There are some considerations:
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