Composite scores – Lesson 8


In financial analysis, a composite is a balance sheet and/or profit and loss statement representing averages for the accounts of a number of companies in the same industry or sector. The accounts of a particular company can thus be compared with a composite to identify abnormalities. Many stock selection methods have emerged which involve evaluating a composite score by combining several factors. Some of these methods include:

Scoring companies

  • Some companies use the composite duration time-period covers the upcoming six months. Scores are rated on a scale from one to ten (highest). The primary components used in this analysis include the following:
  1. Fundamental: Ability to meet earnings expectations, rate of earnings growth, upgrades/downgrades
  2. Ownership: Insider and institutional buying/selling
  3. Valuation analysis: P/E, price/sales (P/S) ratio, and PEG ratio
  4. Technical: change/consistency, 50-day moving-average crossover. A crossover is a point on a stock chart when a security and an indicator intersect. Crossovers are used by technical analysts to aid in forecasting future movements in a stock’s price. In most technical analysis models, a crossover is a signal to either buy or sell
  • Another example is a quantitative model designed to help investor-clients manage market risk. The Score reduces the market risk level to a single number for interpretation purposes. Scores range from 0 to minus 4 for Longs, attempting to reveal levels of technical deterioration and guiding investors to an exit point. Scores range form 0 to plus 4 for Avoids, attempting to show levels of improvement and guiding investors to an entry point. This model is based largely on a variety of technical indicators.
  • This system rates stock investments on a scale ranging from one to four (best) stars. The score is based largely on valuation methods (placing a value or worth on an asset) using cash flow analysis.
  • Stocks are rated from one to ten (highest). Short-term ratings cover the upcoming week. Between 1995 and 2006, the highest rated stocks outperformed the S&P 500 by a better than 12-1 margin over the next five days. Long-term ratings cover the upcoming 12-month period. From 1995–2007, 81 percent of stocks with long-term ratings of 10 increased in price one year later. 79.1 percent of stocks with ratings of 9 increased in price one year later.

    Check out the Auto Screener Tool – Lesson 9