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Stock Scouter, a Powerful New Stock Analysis Tool

Use StockScouter to find and analyze stocks

While many financial sites are cutting back on free investing tools and information, Microsoft’s MSN Money site still offers StockScouter, a powerful free stock analysis tool. 

Microsoft hired Camelback Research Alliance, a Scottsdale, Arizona based developer of predictive models and other analytical tools for institutional investors to develop this groundbreaking tool designed to evaluate a stock’s price appreciation potential over the next six months.

It’s easy to use. Simply enter a stock ticker symbol, and StockScouter displays a numeric score ranging from 1 to 10, where 10 is best.

At first glance, StockScouter looks like a combination of familiar selection strategies. For instance, it looks for stocks with strong earnings growth, recent positive earnings surprises (reported earnings surpassed analysts’ forecasts), and a strong stock chart—factors common to a variety of momentum strategies.

It also analyzes insider buying, and valuation ratios, two factors that are also employed in a variety of analysis techniques.

What’s different is the sophisticated analysis Camelback employs to evaluate the information, and further, how it combines its analysis with a risk measure to come up with its risk-adjusted final score.

Stock Analysis Method
Each stock in its database is categorized according to its industry sector, company size (market capitalization), and whether its valuation ratios indicate it is trading as a growth or value-priced stock. Camelback analyzed data going back 10 years to determine the characteristics most likely to influence the future price performance of stocks in each category.

StockScouter analyzes four attributes of each stock: Fundamental, Ownership, Valuation, and Technical, awarding an A to F letter grade for each. 

Fundamental Analysis 
The fundamental analysis evaluates historical and forecast earnings growth, recent changes in analysts’ earnings forecasts, and earnings surprise history.

The program assesses each of these data points based on a stock’s classification. It may, for instance, give a higher grade to a value-priced, large-cap stock with relatively low earnings growth, than it would to a growth-priced, small-cap stock with the same earnings history.

The analysis is quite complex, evaluating the sustainability of earnings growth rates, recent changes in earnings forecasts, and even considering the experience level of the analysts making the earnings forecasts.

Ownership Analysis 
Camelback’s ownership grade reflects its assessment of the significance of institutional (mutual funds, pension plans, etc.) and insider trading, with insider trades given the most weight. Insider trading data typically includes transactions made by a wide range of company executives, board members, and of any shareholder owning at least 10 percent of the company’s shares.

Camelback, however, focuses its analysis on the trading of key, ‘in the know’ officers such as the chief executive officer or chief financial officer.

Stock Valuation Analysis
The program uses price/earnings and price/sales valuation ratios, along with the earnings growth rate, to determine whether a stock is undervalued or overvalued.

In this instance, Camelback doesn't differ much from conventional approaches, except that it compares historical, rather than forecast earnings growth to the price/earnings ratio to calculate fair value.

Technical Analysis
Many selection strategies count on relative strength, a measure of how a stock has performed compared to the overall market, as a key evaluation parameter.

In most instances, stocks with the highest relative strength are considered the best candidates, provided that they meet the other qualifying conditions.

Camelback takes a different view, preferring a consistent and steady uptrend to a volatile or very steep uptrend. Also, Camelback looks at a stock’s absolute price action rather than comparing it to the overall market. That makes it much harder for a stock to garner a good technical grade in a weak market such as we’ve experienced recently.

Final Score
Camelback adopts a proprietary formula to combine the four grades into a total representing the expected price appreciation (return) during the next six months.

It then compares the calculated expected return to a risk factor related to the stock’s historical volatility to come up with its final score ranging from 1 to 10, where higher is better. According to Jon Markman, MoneyCentral’s managing editor, “ a stock with a high expected return and high risk would score lower than a stock with modest expected return and low risk.”

The stock scores are distributed using a “bell curve,” meaning there are more stocks rated 9 than 10, and more rated 8 than 9, and so on. At the other extreme, more stocks are rated 2 than 1, etc. Markman says “most of the information is at the extremes,” and he advises paying most attention to 9 and 10 rated stocks and avoiding stocks rated 1 or 2.

Getting StockScouter Ratings
You can access StockScouter from the MSN Money homepage (money.msn.com) by selecting Investing (top menu) and then clicking on Stock Ratings in the Stocks section (left menu). The default display shows the rating score and a short evaluation summary. Select Details (left menu) to see a detailed explanation of the rating calculation.

I found the ratings intriguing. For instance, stodgy Sears garnered a 9 rating while Chico’s FAS, currently one of the hottest fashion retailers, only managed a mediocre 6. Hotshot retailer Abercrombie & Fitch, along with The Gap and Saks, all rated a lowly 3.

In another surprise, grocer Albertson’s outranked Safeway, 9 to 7, even though Safeway is generally considered a faster growing operation.

Darden Restaurants, operator of the Red Lobster and Olive Garden dinner houses with a 10 rating outscored Krispy Kreme (9 rating), and the expanding Cheesecake Factory (7) and California Pizza Kitchen (4) restaurant chains.

You can see lists of the 50 highest and 50 lowest rated stocks by selecting Stocks (top menu) and then clicking on Top Rated stocks (left menu).

Can you make money using these ratings? Microsoft has data showing buying the 50 top-rated stocks and rebalancing your portfolio every month substantially beats the market. But doing that is impractical for most individual investors. I’m saving the lists of highest and lowest rated stocks and will report back to you on the results of buying those stocks in a few months. In the meantime, I suggest considering StockScouter as a valuable source of second opinions to backup your own analysis.
published 8/6/01

 

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