The VectorGrader stock rating gives an overview of how the stock stacks up against the market based on multiple indicators. We put a lot of work into researching what indicators are actually useful in predicting future performance as opposed to using indicators that are commonly thought to be useful. We also looked at many of the best performing stocks in the past, and studied the factors that they had in common which could help identify winners in the future.
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To ensure robust results, we attempted to avoid an overlooked flaw in many stock selection methods. Most strategies require a valuation ratio to be below a certain threshold. However, this leads to stocks with a valuation ratio just slightly above that level to be excluded from consideration, even though they are not likely to perform much worse just because the valuation ratio is a little bit higher. To solve this problem, our stock rating system uses a gradient methodology to ensure robustness.
We also did not use metrics that are prone to failure. Some indicators in very common use today aren't all the helpful in predicting the returns of stocks. One example of this is the price to book ratio. It is a very commonly used valuation indicator, yet it isn't all that useful because the outperformance of stocks with low price to book ratios comes largely from micro-cap stocks with low volume. We thoroughly researched our indicators to ensure that investors can actually create alpha using the stock ratings.
One of the best things about our stock ratings is that they don't come with a bias. If the stock rating method doesn't like a stock, than it doesn't like it, unlike most analysts on Wall Street. Wall Street Analysts tend to give stocks positive ratings regardless of a stock's prospects. For instance, the number of stocks with an average analyst rating of a buy or strong buy is normally a bit under 3,000. The number with an average rating of sell or lower: less than 50. The VectorGrader ratings don't have such a bias built in and are thus far more useful to investors.
The chart below shows the median performance of stocks by decile since we launched the VG Stock Ratings. This is a hypothetical graph. Transaction costs and the bid-ask spread are not taken into account. To reduce the possible effect of the bid-ask spread, only stocks with a market cap of over $100M were included.
This chart shows the performance of the top 50 rated stocks.