Factors are the secret to stock market success, hidden in plain sight. This is a guide to how you can beat the market by identifying stocks that rank highly for the traits of value, quality and momentum.
Until recently, selecting the best stocks according to "factor investing" principles was the preserve of the Wall Street elite. For individual investors, it was impossible to access the required data and know-how.
We launched the StockRanks in 2013 to allow individual investors to harness this data-driven firepower in their picks. By performing millions of calculations across timely, accurate financial data each day, we make it easy for all investors to access professional-grade insights and assess how every stock ranks across its Quality, Value and Momentum.
We also boil this data down into a single number - the StockRank - that provides an instant assessment of a stock's combined characteristics.
In constructing the StockRanks, we had some key goals. We wanted to develop a universal stock ranking system that would work across all companies in all sectors. It needed to have strong academic research backing, and act as a predictor of future stock market returns. More than this, as a service for individual investors, we wished it to provide an effective educational framework to encourage deeper learning.
Stockopedia's StockRank is calculated from three primary factors:
This is the extent to which a company's reported financial statements show strong and improving health. We measure the level, stability and direction of profitability, margins and cashflow as well as algorithmically assessing accounting red flags to avoid financial distress.
The best companies to own are profitable, self-funding businesses.
This assesses cheapness - by measuring the level of the company's share price against a range of fundamental measures - including what the company owns (assets) what it earns (sales, cashflow & profits), and what it pays out (dividends).
The best upside potential comes from shares trading below fair value.
This measures the degree to which sentiment is improving in stock - by assessing the direction of travel of both analysts earnings estimates and the share price.
The strongest returns come from investing in the direction of the trend.
Each of these three primary factors is given its own raw score and recalculated daily as the Quality Rank, Value Rank and Momentum Rank. These ranks are then equal weighted and compiled into the StockRank - published to investors every day. This makes the process of identifying stocks strongly exposed to these powerful return drivers easier than ever before. The following diagram illustrates where the StockRank lies at the intersection of Quality, Value and Momentum (QVM).
The main StockRank we publish combines the Quality, Value and Momentum Ranks. It is an equal-weighted composite of all three, re-ranked as a percentile between zero (worst) and 100 (best). High-ranked shares tend to be good, cheap AND strong, and have exposure to all three measures.
The following chart shows the average performance of stocks in each of 10 buckets according to their level of StockRank. There has been a remarkably consistent ‘return spread’ between each of the buckets. Since inception, the higher the StockRank, the higher the average return. It's a powerful and consistent picture.
Since their inception in 2013 to this article's publication in November 2022, the top 10% of shares by StockRank have:
Generated a 14% annualised return - more than 11x the market index
Turned a typical £100,000 portfolio into more than £335,000 over 9 years.
Beaten the market every year at a lower average volatility than the major indices
Beaten more than 90% of international markets globally.
Beyond this, more than 70% of our subscribers tell us that the StockRanks are the one feature that has most helped improve their results.
Risk Warning: Future market environments may be less favourable for factor investing as a whole, and past performance is not an indicator of future returns. Stocks can go down as well as up!
As a single number between 0 and 100, the StockRank couldn't be simpler. But to achieve that simplicity requires an intensive computational process in which raw financial data for 36,000 stocks is transformed using our proprietary algorithms.
The first step is to source data from some trusted third parties. Standardised balance sheets, income and cashflow statements are sourced from Refinitiv - one of the largest aggregators of institutional quality financial data. Forecasts of company earnings, recommendations and target prices are sourced from the Institutional Brokers Estimate System (IBES), while share prices and histories are sourced from stock exchanges around the world. All this data is organised, cleaned and stored in our databases.
The data is then subject to a long computational process. Every night, we calculate two thousand of the most accurate and timely financial ratios for each stock in our database. Basic measures of valuation, momentum and profitability are all calculated, before being made available to higher level services - such as algorithms for financial safety and earnings quality.
Finally, we run our ranking processes. We sort and assign percentile ranks for each individual field, then combine them in well-tested recipes to compute the sub-components of the Quality, Value and Momentum Ranks. We then bring all three of these rankings together into an overall StockRank - which is an equal weighted composite of Q+V+M ranked as a percentage between 0 (worst) and 100 (best).
These ranks are computed every day before the market opens. They have been published on our site for thousands of stocks all around the world since we started in 2013.
The October after we launched the StockRanks, Eugene Fama - who discovered the value anomaly and built his influential three-factor model - won the Nobel Prize for Economics. We knew we were onto something.