Stocks With Low Risk/Reward Scores

by John Bajkowski

Stocks With Low Risk/Reward Scores Splash image

AAII’s Charles Rotblut lays out a risk/reward scorecard in his upcoming book “Better Good Than Lucky” (W&A Publishing). The scorecard uses 10 basic tests of stock valuation, company performance and financial strength, and portfolio diversification to calculate a risk/reward score that tries to measure if a stock might be an attractive candidate for a portfolio. Eight of the measures are quantitative tests suitable for screening, while two of the measures are qualitative and require investor judgment. This issue’s First Cut uses AAII’s Stock Investor Pro to create a risk/reward score tied to the eight quantitative elements of the scorecard and presents 27 stocks with the lowest--that is, best--score.

The valuation elements of the score reward stocks with low price-to-book-value and price-earnings ratios. The company performance elements reward companies with consistently positive cash flow from operations and year-over-year increases in revenue, net income and earnings per share. Analysts’ perception of improving company fortunes is measured by examining changes in consensus estimates over the last month. Company financial strength is scored by looking at levels of the current ratio (current assets divided by current liabilities) and debt-to-equity ratio (long-term debt divided by equity and expressed as a percentage). Comparative performance is scored by measuring the return on equity (ROE, net income divided by equity) relative to all firms. For all of the elements, the most attractive figures are given a score of one, while least desirable figures are given a score of five. The scores are added together to form the risk/reward score. Only one stock had a best-possible score of eight, but 27 stocks had scores of 10 or lower. We did not score firms on their ability to maintain a competitive edge or how a stock might help diversify your portfolio holdings, which are also part of the risk/reward score.

Click here for instructions on creating the risk/reward ratio in Stock Investor Pro.

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John Bajkowski is president of AAII.


James from Florida posted over 3 years ago:

the stock prices are as of 6/18 In the age of computers I would hope that you could give more up to date figures...

Ronald from New York posted over 3 years ago:

why can't you supply the formula to enter in to stock investor pro for Rotbut's system ?
Also Pitrioski 8

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