Know Which Stocks to Trade. And When to Trade Them…
Every week, we screen + rank hundreds of S&P stocks to capture the top-five, most undervalued growth companies, based on a unique 12-rule algorithm (below)…
Over the last 11 years, our five-stocks/week portfolio has generated an average 46.1%/year profits, consistently beating the S&P500 benchmark every year since Dec 2007.
Five-Stock Portfolio Avg Profit/Year
S&P500 Benchmark Avg Profit/Year
From Five-Hundred S&P Stocks to the Weekly Top-Five. In 2 Steps…
Step 1: Every Friday, after the market close, our computers run a systematic algorithm which screens every S&P500 company, against a precise 12-rule combination of company fundamentals + technical-analysis indicators.
Every stock is given a smartRank score between 0-100, based on the unique 12-rule algorithm.
Step 2: The entire list of stocks is then organized into a precise sort-order (ranking) from highest-to-lowest smartRank score. Stocks near the top of the list provide the most optimum, deep-value trading ideas/opportunities.
Every Buy, Sell and Hold. Clearly Defined…
Every Friday (after the market close), we run the 2-step stock-screen/ranking process above, in order to check if there have been any changes to the top-five ranked stocks.
On any particular week, some of the stocks will continue to remain in the top-five. Some stocks will drop below the top-five, others will newly enter the top-five.
The trading rules are simple…
Whenever a stock newly enters the top-five rankings, this represents a ‘buy’ signal for that stock (in the example here, Humana and HollyFrontier have both newly entered the top-five rankings, hence become ‘buys’ on the Monday open).
Whenever a stock drops below the top-five, this represents a ‘sell’ (exit) signal for that stock (in the example, Salesforce and Intuit have both dropped below the top-five rankings, hence become ‘sells’).
As long as a stock stays in the top-five rankings, we continue to ‘hold’ that stock (in the example, TripAdvisor, Chipotle, and NetApp ‘continue’ to be in the top-five, so are ‘holds’).
Trading the five-stock portfolio, the model has generated an average 46.1%/year returns (without using any margin), consistently outperforming the S&P500 benchmark in 11/11 years since December 2007.
- SmartRank Five-Stock Portfolio Avg Return/Year: 46.1% 46.1%
- S&P500 Benchmark Avg Return/Year: 9.04% 9.04%
We Don’t Just Buy Stocks with a Low P/E Ratio…
The 12-rule trading method is an advanced algorithm which doesn’t just look at stocks based on commonly used measurements such as price-to-earnings ratios (P/E) or record-quarter EPS-beats.
Whenever you hear media pundits talk about how XYZ shares are a “strong-buy because of a low P/E ratio” or a “record earnings beat”, does that information actually have any real ‘depth’ of meaning?
In our view, these ‘static’ ratios are not only meaningless, but actually misleading.
A ratio ‘by itself’, such as the P/E ratio, or price/sales has little-to-no value, unless it is compared historically, and against median-ratios across competing stocks in the same industry.
In our trading, we don’t just look at stocks based on a particular static ratio, even if it offers a eye-popping low P/E, or a record-breaking earnings beat.
The key component we apply to our stock-selection method, is ‘relativity’ (more info below).
Every one of the 12-factors we apply has ‘relativity’ built-in, in order to find ‘true value’ trading opportunities, where the context of relative-comparison is fully coded/factored in…
Here’s a quick example of just one of the 12 factors we apply to the stock-selection process…
If a trader is looking at a company with a gross-profit-margin (GPM) of 35%, that would seem ‘in and of itself’ quite a respectable margin. However, if the trader delves a little deeper and ‘compares’ the current GPM to the company’s historical average of 50%, then a different picture emerges.
In fact, the current GPM of 35% falls significantly short of its own equilibrium of 50%. That is a red flag.
Additionally, if the trader drills deeper and finds that the ‘industry-median’ GPM happens to be 58%, then again, the 35% GPM in the stock becomes relatively sub-standard vs the industry. Another red flag.
This ‘relative’ study, which applies to every fundamental metric, be it gross-margin, price/sales ratio, revenue growth, or debt/capital ratio, provides a clearer, contextualized picture of whether a company actually offers a true value opportunity (or not), relative to its own equilibrium, and industry-peers.
Factor-based investing provides the ability to combine multiple investing rules. We take this a step further by applying ‘relativity’ to every one of the 12 factors we apply towards our top-five ranking stocks.
Thanks to technology, the entire process is fully-automated. The entire process of finding deep-research trading opportunities takes a few seconds in-house. Once checked, the top-five ranking stocks are ready-to-go, emailed to subscribers every Sunday, around 6pm.
Factor-based investing provides the ability to combine multiple investing rules working in synergy. We take this a step further by applying ‘relativity’ to every one of the 12 factors we apply towards our weekly top-five stocks.
Factor-Based Investing – Simplified…
Trading is never (and should never be) based on one or two indicators alone. Some of the most accomplished investors like Warren Buffett, Paul Tudor Jones, and Benjamin Graham have written numerously about this.
In Jack Schwagers book “Market Wizards: Interviews with Top Traders” there is abundant evidence of factor-based investing at work, as some of the worlds most successful self-directed investors apply a combination of indicators (factors) in their trading, integrating both company fundamentals, and technical entry timing.
Each individual indicator/factor has its merit. The objective with factor-investing is to combine the rules into a more complete, fully-integrated stock-selection method.
Here’s how the method works…
In the below example, you can see a very simple 4-factor model algorithm. A single factor can be any indicator (can be fundamental such as ‘gross margin’, or technical, such as ‘relative volume flow’)…
Each factor is given a score depending on how that indicator is performing ‘relative’ to history, and how it performs in relation to industry-peers.
For instance gross-margins relative to history (factor 1 below) has a high score, as the current GPM is high relative to historical equilibrium, and to industry-peers.
Each factor is also given a ‘weighting’ (depending on its significance towards the total of 100%). Adding up the ‘weighted-scores’ results in a final rankable-score (eg., smartRank score).
Building a factor-based trading algorithm begins with a clear theme/objective. In our 12-factor algorithm, we initially look for companies which exhibit continuing growth in sales revenue with sustainable gross margins, reasonable-to-low debt/capital levels, and strong [sustainable] operating and free-cash-flow margins.
Each of these factors are provided a score depending on relative performance vs the company’s own intrinsic history and performance vs industry-peers.
These (amongst others) are our core fundamental requirements.
From this initial shortlist of quality [sustainable growth] businesses, the algorithm targets specific stocks that have undergone a recent technical pullback, combined with pattern price/volume activity (including institutional money-flow) signaling a high-probability recovery/rally.
Specifically, we apply 12 distinctive rules (factors) which combine both fundamental metrics, and technical-timing indicators. These are…
- Gross Margin (relative to history)
- Free Cash Flow Margin
- Price/Sales Ratio
- Price/FCF Ratio
- Price/EBIT Ratio
- FCF/Capital Ratio
- Debt/Capital Ratio
- FCF Margin Growth
- Revenue Sustainability
- Institutional (Smart) Money-Flow
- Relative Volume Trend
- Technical Analysis Indicators (Oversold)
A precise formula combines all 12 factors (depending on weightings), resulting in a single, simplified smartRank score, for each of the five-hundred S&P companies we track.
Every weekend, we sort-order (rank) every qualifying stock, from highest smartRank score, to the lowest. Our top-five ranking stocks are then ready/published weekly…
Become a Smarter, Better-Informed, Better-Prepared Trader…
Every Sunday around 6pm, we publish the latest, top-five ranked S&P500 stocks, based on the strategy. This allows us (and our subscribers) to see all the latest ‘buys’, ‘holds’ and ‘sells’…
We ‘buy’ any new stock which has entered the top-five. We ‘sell’ (exit) any stock no longer in the top-five. We ‘hold’ any stock which continues to remain in the top-five.
As a subscriber, having access to pre-screened, superior-quality stock picks will save hours of research time capturing those companies which offer the best value, relative to the 12-point algorithm…
We do all the research, and our unique factor-based algorithm identifies the stocks that meet the 12-point criteria. Our subscribers simply execute the trades, and follow the model.
Let Us Do the Math…
While the method has been developed through years of real-time trading (focused on S&P500 stocks), and rigorous testing, keep in mind that the entire process we use to capture the weekly top-five ranking stocks, is fully automated.
Our subscribers do not need to worry about every mathematical ratio, or complex fundamental or technical indicator. Emulating our trades is a straightforward process. By focusing only on liquid, largecap S&P500 stocks, traders can enter/exit trades with ease.
As a subscriber, you will receive the following…
- Every Sunday, around 6pm, we send each member an email report (PDF format).
- The report shows the top-five ranking stocks based on the 12-point method.
- If a new stock enters the top-five, that stock is ‘bought’ at the Monday open.
- If a previously held stock no longer appears in the top-five, that stock is ‘sold’ at the open.
- If a stock re-appears from the previous week, that stock is ‘held’.
- Members will have full access to our helpdesk at any time throughout membership.
- Ask any questions, no matter how simple or complex – we are here to help you advance.
We don’t just stop at providing our weekly top-five report. Our goal is to make you a smarter, better informed, better-prepared trader. You will build confidence witnessing market-outperformance, trading alongside experienced, fully knowledgeable, self-directed traders.
We combine deep research, with a precise rule-based stock-selection approach. The result is a more superior, complete trading plan-of-action – one that has proven to deliver consistent profitability and outperformance against the stock market year after year.
Join us today (free for 2 weeks), and start elevating your trading to a new level.
To get started, click the subscribe link below. If you have any questions, please get in touch with us.