The A+ Stock Grades system is based on percentile rankings of multiple key metrics within five investment factors: value, growth, momentum, earnings per share (EPS) estimate revisions and quality. They represent a summary of a company’s fundamentals and give you a quick overview of how a stock rates based on the five investment factors that have been shown to produce market-beating results.
Each factor grade is determined by a corresponding score, or percentile ranking, that is calculated and updated daily. The scores underlying each company’s factor grades can be viewed from within the Stock Evaluator, on the Grades tab in the gray ribbon near the top of the page. Type in a company name or ticker in the search box at the top-left of the AAII website, and then click on the company’s name in the drop-down list to access a company’s Stock Evaluator page.
The Value Score is the percentile rank of the average of the percentile ranks of the price-to-sales ratio, price-earnings ratio, enterprise-value-EBITDA (EV/EBITDA) ratio, shareholder yield, price-to-book-value ratio and price-to-free-cash-flow ratio. The score is variable, meaning it will consider all six ratios or—should any of the ratios not be valid—the remaining ratios that are valid. To be assigned a Value Score, stocks must have a valid (non-null) ratio and corresponding ranking for at least two of the six valuation ratios.
The Growth Score considers a company’s success in growing sales, earnings per share and operating cash flow on a year-over-year basis for the latest-reported fiscal quarter and on an annualized basis over the last five years.
The Momentum Score is the weighted four-quarter relative strength rank, which is the relative price change for each for the past four quarters. The most recent quarterly price change is given a weight of 40% and each of the three previous quarters is given a weighting of 20%.
The Estimate Revisions Score is made up of components that examine the magnitude of a company’s earnings surprises for the last two reported fiscal quarters as well as the change in the consensus estimate for the current fiscal year over the last one- and three-month periods.
The Quality Score is a combination of five components, or traits, associated with upside potential and reduced downside risk. The components consider management’s financial decisions (accruals and change in asset turnover), whether the interests of shareholders are being recognized (share buybacks and dividends) and whether analysts are more optimistic than they were previously about the stock (earnings estimate revisions).
