InvestRate’s Stock Ranking Model combines both major approaches to equity
With the fundamental approach, the Model derives implied stock values from estimates of potential future cash flows, assuming all companies maintain a stable long-term growth in line with the overall economy and operate at margins consistent with long-term industry averages. The Value Potential of all stocks is then rated on a five-grade scale (“Strong”, “High”, “Average”, “Low” and “Poor”) on the basis of a ratio of this implied value to a stock’s current market price. Based on the same ratio, we also report the Value Potential Percentile Rank for every stock. This indicates percent of all stocks under coverage that have the ratio of the model-implied value to the current market price lower than that of the security in question.
With the relative approach, our analysts look at a set of valuation (price-based) and fundamental (balance sheet-based) ratios and compare how individual companies rank relatively to (i) all stocks under coverage; and (ii) all stock within their industry. After aggregating a stock’s relative performance in these ratios, the model produces the Relative Value Percentile Rank. The rank indicates percent of all stocks under coverage that rank below the stock in question in this scheme.
A detailed description of the model is available in this methodology flowchart (61 kB, PDF).
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