Some thoughts about the Quality Rank

It’s been an interesting week in the market, with plenty of spectacle to witness.

I had written about MONI (Monitise). Its Stock Rank is 17; a sign of trouble. The shares have fallen 83% over a 1 year period. That fall would have had some reflection in Stockopedia’s SR (Stock Rank). So there’s obviously going to be some correlation between performance and rank. You will notice, though, that even though the momentum score is low, the value and quality score is also low. MONI’s Q (Quality) score is 36. To put that in perspective, PFD (Premier Foods) has a Q score of 34. So they’re about on par. I can readily see that PFD has a market cap of £342m, and an EV (Enterprise Value) of £927m. So net debt is about twice market cap. As quality goes, that’s pretty low.

TUNG (Tungsten) also featured heavily in the news. Its Q score is 21. Pretty bad. Its Stock Rank is 12. I don’t know anything about TUNG, but the impression I’m getting is that it is headed by a high-profile businessman, and that there were some high net worth high profile investors who held shares.

Whilst Stock Ranks are not perfect – PLUS has a Quality Rank of 90 and an overall rank of 84 – I think it does its job remarkably well. Company’s with SRs of 20 or less should definitely be treated with a high degree of suspicion. The urge to some bottom-fishing can be very enticing, but often costly. Very low momentum scores should probably be taken as a warning sign, not as a cue to bet the farm.

Although I have done no back-testing, I actually have a hunch: a portfolio of shares with Quality scores of at least 95, paying dividends of more than 3%, with net cash, will beat the market in the large majority of cases.

Out of interest, I chose one of John Lees shares at random: ANP (Anpario). It has a quality score of 96, which is telling. It also has net cash. Unfortunately, its dividend yield is only 1.7%, which falls below my suggested selection criterion. It has had a cracking run over the last year: up 21%, compared with the Footsie of 2%. I had actually considered buying it a couple or so years ago, but rejected it for one reason or another. Silly me!

Have a good weekend, and enjoy the sunshine.

About mcturra2000

Computer programmer living in Scotland.
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