The Low PEG Stocks Ratings System and StrategyThe System is essentially a quantitative model for determining
how fundamentally sound a company is and how likely it is that it's stock price will
outperform the primary universe of stocks (presently the S&P500 index components minus
companies in the financial and utilities sectors) moving forward.
The Underlying Numbers
Forming the base of the model are 48 underlying statistics which are calculated on
all stocks in the primary universe plus the extended universe (presently all components
of the S&P500, the S&P400 midcap index and the S&P600 smallcap index, minus all companies
in the financial and utilities sectors).
Based on the results of each underlying statistic, the stocks are divided into deciles -
this gives us a score out of 10 for each statistic for each stock.
The System Subfactors
The 48 scores for each stock are then categorised, weighted and aggregated into subfactor scores. | PEG Metrics | A modified PEG ratio designed to measure the earnings and growth of a company relative to the price. This metric overcomes some major shortcomings of the standard PEG ratio. |
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| Earnings Yield | The basic measure of profitability - how much does the company make (before interest and taxes) versus how much the company is worth (Enterprise Value). |
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| Growth Rates | How fast the company is growing, measured over a number of timeframes. |
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| Organic Business Growth | Indicates how much of the company's profit growth is due to expanded operations and increased business versus reduced expenses versus earnings from accounting techniques. |
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| Internal Rate of Return | Measures how well a company can use its resources to generate profits, and how effectively it can compound its returns. |
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| Estimates Variability | How much consensus there is on future earnings and how stable the estimates have been over time. |
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| Earnings Surprises | An analysis of how accurate earnings estimates have been in the past and how well company management has controlled expectations. |
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| Historical Trends & Consistency | How stable earnings and business growth has been in the past. |
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| Liquidity | Analyzes liquidity and turnover of assets versus probable liquidity requirements for a company. |
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| Debt & Solvency | How solvent a company is and how able it is to manage and pay down its debt. |
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| Cash & Cashflow | Measures cash on hand relative to company size and cashflow from operations relative to income from operations. |
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| Buybacks & Share Supply | This subfactor measures the trend in the supply of shares available in the market. The likely influeces are share buybacks and issuance plus exercise of internally issued options. |
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| Price Momentum | Simple momentum, current market capitalization versus market cap. 1 year ago. |
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| Insider Movement | The trend in insider holdings. |
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The System Factors
The process described above is then repeated to create 5 factor scores from the subfactor scores. The nature of the overall strategy hinges on the design of these 5 factors. Their description serves as the most suitable and compendious profile of our method for analysis and evaluation. | Price vs Earnings & Growth | The primary measure of value as determined by earnings and earnings growth rates over various time frames compared to price. |
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| Quality of Earnings & Growth | All earnings are not equal, profits can be grown in a number of ways. This factor complements the PEG Factor by measuring its quality. |
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| Predictability of Earnings & Growth | Future growth rates are unknown. We use estimates from equity analysts but give consideration for how accurate they are likely to be. |
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| Financial Strength | An indicator of the company's overall financial position at this point in time. It is primarily a measure of fundamental risk. |
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| Technical Strength | Price momentum, insider transactions and share supply are the determinants of technical strength. |
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Total Score - the final number...
Once again the factor scores are weighted and aggregated into a single number which is the total score
and rating for the stock.
At each stage of this process, the results are divided into deciles, so we always have a
score out of 10 with the same number of stocks from the primary universe for each score.
Note that the deciles are derived from the population of the primary universe only, although
stocks in the extended universe also receive a score out of 10.
| | More Strategy Info...Ratings System Version 1.0 Finalised
The stock ratings system has been developed and finalised
for the launch of the site and the immediate future.
The un...more
posted: September 1, 2008
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