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Stock Research Process: taking advantage of today’s technology

MarketGrader.com's research focuses on identifying the companies that are consistently creating economic value today in order to help our clients find the stock that will create shareholder value tomorrow through the extensive use of technology.

While we understand that no company or industry is immune to the ups and downs of economic and business cycles, we believe well managed, profitable companies focused on building wealth for their shareholders will always stand out in the long run and make for the best investments. And while qualitative research helps investors understand the story behind each company including its products, management, competition and its business in general, quantitative research helps investors understand the story told by the company’s numbers, which usually don’t lie. Even though the term ‘quantitative’ is usually associated with black boxes, complex mathematical formulas and secret methodologies in general, at MarketGrader.com we give it a different meaning. To us quantitative research is about taking advantage of today’s technology to perform relatively simple processes thousands of times reliably and efficiently. Our quantitative research process is about performing a thorough and intelligent analysis of a single company’s fundamentals once, getting it right and then repeating the process across thousands of companies daily. By ‘getting it right’ we don’t mean to imply we have a magic formula or crystal ball that will never fail. What we mean is that the purpose of our research process is to arrive at the essence of a company’s financial health by analyzing its financial statements and identifying its fundamental strengths and weaknesses. Our analysis identifies if a company is successful at what it does, if it is growing, if it is run in the best interest of its shareholders, and whether its shares can be bought for a reasonable price.


MarketGrader.com analyzes a company from four perspectives: Growth, Value, Profitability and Cash Flow. Each one of these categories is in turn comprised of six indicators, many of which vary based on the company’s industry or Industry in order to measure the differences across diverse business models. Each indicator is assigned a letter grade from A+ to F, and each letter grade is assigned a numerical equivalent used to calculate our overall grade. Therefore if a company receives a grade of ‘A+’ in all 24 indicators, it will receive a perfect overall grade of 100. While we’ve never had a company get a perfect score since we started keeping track of our grades in 2003, we’ve had plenty of companies score very highly, in the 80s and 90s. All companies with an overall grade of 60 or higher are given a ‘buy’ rating; a ‘hold’ is given to all grades between 50 and 59 and a ‘sell’ is given to all grades between zero and 49.


Our Growth category indicators measure the short term and long term growth of the company’s top line (revenue) and bottom line (net income) using quarterly and trailing twelve month data, as well as what happens in between (margins) from year to year. In other words, while growth in and of itself is very important in our analysis, growing profitably is closely measured and graded and given significant importance also. Within this category we also measure the long term growth trend in the company’s earnings per share. Our last two growth indicators, while not measurements of actual company fundamentals, measure the impact its earnings announcements have on the price of the stock and the company’s habit of exceeding, meeting or missing its own guidance and the estimates tracked by analysts and investors. While to someone unfamiliar with our research these indicators may seem too short-term oriented, we feel a company’s earnings announcements play too important a role in the performance of the stock not to make them a part of our Growth indicators. However, you may easily find plenty of companies in MarketGrader.com that have a habit of beating earnings estimates yet perform very poorly in our fundamental analysis and are rated ‘sell.’ In the case of industries where dividends are important to investors such as banks, REITs, and many financials in general, we measure in this category the company’s ability to consistently pay out a dividend and grow it over time.


Our Value category compares the price of the company’s shares and its overall market capitalization to several fundamental metrics. Our ‘P/E Analysis’ indicator calculates the price at which the company’s shares would be fairly priced based on its long-term earnings per share growth record. As such, younger, growth oriented companies may be priced fairly at a level that is much higher than a mature, slow-growing company. MarketGrader. com compares the stock’s actual price to earnings ratio to the ‘optimum’ level based on EPS growth and calculates the grade based on the relationship between the two. The highest grades are assigned to those companies under priced by the market based on their own growth rates. In this category we also measure the company’s valuation to its book value, or the amount of tangible equity in its balance sheet, its cash flow and its sales. Each company’s capital structure, or the balance between equity and debt is also analyzed and graded in our Value category. In the case of banks and certain financial institutions, we measure their capital structure quite differently. We measure how much equity capital they have relative to their assets, which is where they derive income from. We therefore measure their ability to support different levels of leverage with the capital in their balance sheets.


Our Profitability category focuses on how successful the company is at making money, whether building widgets, providing a service or whatever its business may be. Therefore several of this category’s indicators vary based on industry or Industry, accounting for the differences in business models. Our Profitability indicators measure the company’s return on equity, or its operating return to its shareholders and whether it has improved over time; we consider it the ultimate measure of profitability. Also very important in our analysis are the company’s margins, which we measure both on an absolute basis and relative to its peers. In the case of banks and other financials, we measure profitability quite differently. We measure the banks’ efficiency in putting to work—or lending—the funds they collect as deposits as well as their profitability relative to the cost of those funds. One of our bank indicators also measures the amount of the financial institution’s assets that are not performing relative to its capital cushion in order to anticipate future declines in its profitability.

Cash Flow

While several of our Cash Flow category’s indicators could also be considered measures of profitability, this section of our analysis focuses on how the company manages the cash it generates from operations, how aggressive or conservative it is with it, and whether it is growing. We also analyze the company’s ability to reinvest some of its cash in its business, finance its debt, or distribute it back to its shareholders in the form of dividends. Our Economic Analysis in particular measures a company’s operating returns on capital relative to the cost of all forms of capital, including equity and debt, something overlooked by many measures of profitability. For banks and certain financials MarketGrader.com’s Cash Flow indicators focus on their solvency and the size of their reserves relative to future expected losses. We also measure their leverage by comparing their tangible equity to their assets. And for industries where the payment of dividends is an important issue for investors looking for income, we measure the company’s dividend yield, compare it to its peers and try to gauge its sustainability.

Identifying Strengths and Weaknesses

The granularity and depth of our analysis allows our clients to identify individual areas of strength and weakness in a company’s financial reports in a manner that is intuitive, simple and actionable. This for example makes it possible to find a company with a strong overall grade and a ‘buy’ rating but very weak Value indicators. This might prompt them to find one with a better balance between Value and Growth if they don’t want to overpay for the stock. Many of these balanced stocks can be found in our system across most sectors given the breadth of MarketGrader.com’s coverage. What they’re unlikely to find in MarketGrader.com are companies with excessive leverage or that are unprofitable, or stocks that are extremely expensive with a high overall grade. Since MarketGrader.com is assessing so many aspects of every company’s financials, it takes excellent financial performance for a company to achieve very high marks, allowing our clients to pick the best of the best. Our methodology strives for balance between Growth and Value—what some would call ‘growth at a reasonable price’—while always focusing on profitability and the sound management of a company’s cash flow.

Our Ratings

Companies rated 'buy' have a consistent growth track record over the short and long term and the ability to steadily increase earnings. While our system allows companies with high valuations by traditional standards the opportunity to be rated ‘buy,’ their profitability and growth track records must be impeccable. This rewards a business environment that fosters disciplined risk-taking with solid management skills. Nevertheless, MarketGrader.com’s strict valuation metrics scrutinize every company in absolute terms as well as relative to historical growth rates and to peer valuation averages. ‘Buy’ rated companies must always adhere to strict profitability standards with a special focus on financial margins and return on equity. The system allows much flexibility for leverage to companies that demonstrate high returns on invested capital with a clear ability to service debt without impairing growth. From the cash flow perspective, ‘buy’ rated companies typically demonstrate an ongoing ability to generate enough cash from operations to service debt, organically grow their business through income reinvestment and create shareholder value through consistent returns on invested capital, sustained earnings growth, and in many cases the payment of dividends.

Companies rated 'hold' by MarketGrader.com are for the most part in a transition process either on an improving fundamental outlook or in the middle of a deteriorating business environment. It is adequate to assume that the characteristics of these stocks represent a middle ground between ‘buys’ and ‘sells.’

'Sell' rated companies for the most part embody characteristics opposite of those rated ‘buy,’ including declining top and bottom line growth over the short and long term coupled with inconsistent earnings per share results. In many cases the valuation indicators of these stocks are not necessarily as poor as those of some companies with higher overall ratings; this may be attributed to the market having at least partially discounted the company’s meager fundamental record. However, plenty of ‘sell’ rated stocks in the MarketGrader.com system are overvalued, making them very risky investments considering they also tend to have poor profitability indicators, a trademark of highly speculative stocks. MarketGrader.com ‘sells’ possess poor to mediocre profitability indicators including at times unjustified leverage relative to the stock’s return on equity and cash flow. These stocks’ cash flow indicators evidence a struggling business environment and generally weak management policies instituted to maintain the company afloat while better business conditions materialize.

Simplicity and Transparency

The way our research is presented on our web site and our PDF reports is to us as important as the actual analysis behind each one of our ratings. In each one of our presentations we strive for simplicity and transparency. We don’t expect our clients to simply take our word for any grade or rating but to actually drill into our analysis and understand where our results come from. This doesn’t mean they’re expected to be financial analysts or spend hours analyzing company statements since, after all, that’s our role. But we do expect them to question every one of our grades and as such have designed our presentation in a way that is simple and easy to understand and an environment that welcomes scrutiny and interaction. Throughout our web site clients may find charts and visual aids that show the numbers behind our ratings and analyses. And our ‘Performance’ page, available for every company we cover, shows them how our ratings have performed across multiple time periods. MarketGrader.com’s entire fundamental analysis is based on financials as reported by each company in its 10-Q (quarterly) and 10-K (annual) filings. All numbers that are used in the calculation of our indicators are referenced in our reports, as are all calculated values such as ratios and averages. Therefore there is no black box to speak of and certainly no human opinion involved in issuing any of our grades or ratings. Even though little changes from one day to the next in the fundamentals of most companies, except for those that reported quarterly or annual results the day before, MarketGrader.com recalculates all grades for all companies every night following a day in which the market was open. If a company reported earnings that day, that night’s update will incorporate all its latest financials and publish them before the market opens the following day. Each nightly update also incorporates that day’s closing prices, used to update our Value indicators. As an independent research provider MarketGrader.com has no hidden agenda and no ax to grind. We’re in the business of keeping investors informed and help them make educated investment decisions. We’re not in the business of selling stock or underwriting securities. Our business is helping our clients invest successfully.