I’m using a consensus strategy to get a quality set of stocks to invest. The strategy relies on data from a number of sources, including Buy recommendations from several renowned stock data providers and analytical services. This is why I’m calling the approach the consensus strategy. Importantly, the stocks I’m getting there are generally believed to have a great potential to outperform the stock market in the coming months, they have a consensus recommendation of Buy, their fundamentals are scored considerably better than most stocks and their average target price by stock analysts is above current market valuation.

With the consensus strategy, in order to consider buying the stock’s shares, the following criteria need to be satisfied:

  • TheStreet score: A+ or A
  • Zacks Rank: 1 (Strong Buy), 2 (Buy) or 3 (Hold)
  • Weiss Ratings recommendation: A or B
  • Yahoo Finance recommendation: at least mixed Buy/Hold
  • MarketBeat recommendation: at least mixed Buy/Hold
  • Yahoo Finance target price: min. 5% higher than current price
  • MarketBeat target price: min. 5% higher than current price
  • Piotroski F-Score: min. 4
  • Moody’s Daily Credit Risk: 1 to 6
  • InvestorsObserver Overall Score: min. 50

If you decide to buy any of the below stocks, you might want to consider the following selling conditions (at least one of them should be satisfied):

  • price is higher or close to target
  • profit is in range 20% – 30%
  • loss is higher than 50%
  • TheStreet recommendation is changed to Sell
  • Weiss Ratings recommendation is changed to Sell
  • Yahoo Finance recommendation is changed to Sell

 

Now, a few words on the criteria I’m using and sources of data.

 

1. TheStreet score

The first filtering step is to get stocks with Buy recommendation at TheStreet stock screener (https://www.thestreet.com/r/ratings/reports/ir-screener.html). I’m only keeping stocks with A or A+ rating (top ones), although A-, B+, B and B- are Buys as well.

From thestreet.com:

A (Excellent) – The stock has an excellent track record for maximizing performance while minimizing risk, thus delivering the best possible combination of total return on investment and reduced volatility. It has made the most of the recent economic environment to maximize risk-adjusted returns compared to other stocks. While past performance is just an indication — not a guarantee — we believe this fund is among the most likely to deliver superior performance relative to risk in the future as well.

And about the methodology (source: https://www.thestreet.com/r/ratings/reports/detail/T.html):

TheStreet Ratings’ stock model projects a stock’s total return potential over a 12-month period including both price appreciation and dividends. Our Buy, Hold or Sell ratings designate how we expect these stocks to perform against a general benchmark of the equities market and interest rates. While our model is quantitative, it utilizes both subjective and objective elements. For instance, subjective elements include expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings. Objective elements include volatility of past operating revenues, financial strength, and company cash flows.

 

2. Zacks Rank

It is required that the Zacks Rank is Hold, Buy or Strong Buy (so we’re avoiding stocks with Sell and Strong Sell recommendations). The Zacks Rating utilizes a completely different system, based on company earnings-related data, in particular earnings estimate revisions and earnings surprises, to predict profitability of holding the company’s shares. More from https://www.zacks.com/education/stock-education/zacks-rank-guide-6:

The Zacks Rank is a proprietary stock-rating model that uses trends in earnings estimate revisions and EPS surprises to classify stocks into five groups:

Zacks

A portfolio of Zacks Rank #1 (Strong Buy) stocks has beaten the market in 26 of the last 31 years with an average annual return of +24.3% a year; more than double that of the S&P 500’s +10.6% .

 

3. Weiss Ratings recommendation

We’re only keeping stocks with Buy (B) or Strong Buy (A) recommendation.

Wjat are these scores? This is what I found at their website (https://weissratings.com/help/rating-definitions):

“A” Rating: Excellent. The company’s stock has an excellent track record for providing strong performance with lower-than-average risk, and it is trading at a price that represents good value relative to the company’s earnings prospects. While past performance is no guarantee of future results, our opinion is that this stock is among the most likely to deliver superior performance relative to risk in the future. Of course, even the best stocks can decline in a down market. But our “A” rating can generally be considered the equivalent of a “Strong Buy“.

“B” rating: Good. The company’s stock has a good track record for delivering a balance of performance and risk. While the risk-adjusted performance of any stock is subject to change, our opinion is that this stock is a good value, with good prospects for outperforming the market. Although even good investments can decline in a down market, our “B” rating is considered the equivalent of a “Buy“.

 

4.  Yahoo Finance  recommendation and target price

It is required that the Yahoo Finance stock recommendation is at least mixed Buy/Hold from experts. Additionally, the predicted target price (average, from experts) should be at least 5% higher than the current one.

 

5. MarketBeat recommendation and taget price

Similar to Yahoo Finance, it is required that the MarketBeat stock recommendation is at least mixed Buy/Hold. Additionally, the predicted target price (average, from experts) should be at least 5% higher than the current valuation.

 

6. Piotroski F-Score

The Piotroski score is a number between 0-9 that reflects nine criteria used to determine the strength of a company’s financial situation, including profitability, leverage or operating efficiency. Zero is the worst value and nine is the best. As we can read in Piotroski’s paper from 2000:

In addition, an investment strategy that buys expected winners and shorts expected losers generates a 23% annual return between 1976 and 1996, and the strategy appears to be robust across time and to controls for alternative investment strategies.

It is required that the score is 4 or higher. The values were retrieved from https://www.gurufocus.com.

 

7. Moody’s Daily Credit Risk

Moody’s Daily Credit Risk Score is a 1-10 score, which provides a forward-looking, one-year measure of credit risk. It is updated daily and takes into account day-to-day market movements compared to a company’s liabilities.

The value is retrieved from https://markets.businessinsider.com and is expected to be in the range of 1-6.

 

8. InvestorsObserver Overall Score

The rank has a value in between 0 and 100. It takes into account both technical analysis and fundamental stock data. An Overall Rank of N means that a given company is rated above N% of stocks, therefore the higher the number, the better. My requirement is that the company has InvestorsObserver Overall score of at least 50.

More detailed explanation from https://www.investorsobserver.com/learning-center/what-the-scores-mean/what-does-the-overall-score-mean:

The Overall Score combines our two technical scores (Short Term and Long Term) with our Fundamental Score into one metric. This makes our overall score a great place to start when evaluating stocks, regardless of your investing style.

A low score doesn’t necessarily mean a stock is likely to go down, just that our system doesn’t think there’s much of a bullish case for it.

 

Best,

Michael

 

Disclosures:

  • What you see here is my personal opinion, my own investments and should not be treated as investing advice
  • I’m an amateur investor

 

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