Reader Mailbag: What Makes Our Ratings System Tick?

In my spare time (what little of it there really is), I teach communications classes online for a university.

I got into that well before I started in the financial world, and I can’t seem to walk away.

Because I teach these classes online, it is extremely important for me, as an instructor, to provide constant and effective feedback to students.

It helps students understand their performance, find areas for improvement and ultimately grow and develop their strengths and shore up their weaknesses.

It’s the primary reason why we constantly ask for your feedback here at Money & Markets.

We not only want to know how we’re doing but how you’re doing.

In the end, we’re a community, and constant communication is what makes our community thrive.

That’s why I was tickled when we received a great set of questions from a reader recently.

A Question About the Green Zone

Craig W. sent in this batch of questions to our Feedback@MoneyandMarkets.com inbox:

I absolutely love the Green Zone Power Ratings system… thank you! Perhaps you’ve covered this, but I would like to know: 1) Is anything rated “Bullish” an automatic buy (after other research)? And 2) I assume anything rated “High-Risk” is, in most cases, not to be bought — if held, is it an automatic sell?

I know there are more considerations when purchasing or selling equity; I’m just looking for generalities.

Craig, first of all, thank you for the excellent questions!

They speak to how Adam’s Green Zone Power Ratings system works and, more importantly, how you should use it.

Let’s start with how it works…

What the Green Zone Tells Us

I won’t get too deep in the woods on all the data points that make up the Green Zone Power Ratings system, but I will show you how to interpret the overall scores:

The chart above provides a straightforward breakdown of what an overall score tells you.

For example, if you look up XYZ Inc. (NYSE: XYZ) on www.MoneyandMarkets.com and find that it rates a 39 overall, that should tell you a few things.

First, Green Zone Power Ratings finds the stock to be “Bearish,” meaning we expect the stock to underperform the broader S&P 500 over the next 12 months.

Second, with that rating, it is best to avoid the stock.

Let’s say XYZ had an overall rating of 83 out of 100.

Green Zone Power Ratings rates the stock “Strong Bullish,” meaning it is expected to outperform the market by at least 3X over the next 12 months.

Stocks with that rating are the ones to buy.

One Tool In Your Investing Box

Anyone who has followed our work at Money & Markets for a while has likely heard Adam or me say that it’s best to have a system in place that you follow to the letter.

The Green Zone Power Ratings system is meant to be one of the tools in that system.

It can be your starting point or your ending point, or you can use it somewhere in the middle of your research on whether to buy or sell a stock.

Yes, the system is comprehensive. It breaks down the overall rating into the six most widely used market factors: Momentum, Size, Volatility, Value, Quality and Growth.

Craig’s email made an interesting point using just three very important words … “after some research.”

This is why it’s important to have a system in place… whether that be with Adam and me in one of our paid services or on your own.

If a stock looks attractive to you and scores well on the Green Zone Power Ratings system, that is a place to start. From there, it’s always recommended that you dive deeper into the company.

What’s its financial trajectory for the last five years?

Has it grown its earnings per share, and if so, by how much?

How do the company’s price-to ratios match up with those of its competitors?

There are hundreds of other questions to consider, depending on how deep you want to go.

To answer Craig’s questions:

Stocks rated “Bullish” or better on the Green Zone Power Ratings system are considered buys, but yes, you should do further research before pulling the trigger. After all, it’s next to impossible to buy every stock rated “Bullish” or higher on the system, as that would be hundreds of positions to manage in your portfolio.
Stocks rated “Bearish” or “High-Risk” are ones to stay away from. Now, if you already hold a stock rated “High-Risk,” the decision to sell is based on the system you are using. Look at the stock’s factor ratings. Why does it rate low on any given factor?

The main point is that the Green Zone Power Ratings system is a potent investment tool.

Adam has taken the most widely used factors (those used by Wall Street hedge funds) and distilled them into a simple, easy-to-digest ratings system.

On top of that, it is important to have a system — an additional set of tools that helps you make the right decision.

Thanks again for your question, Craig.

If you have any questions you want Adam or me (or both) to address, send them our way. Email Feedback@MoneyandMarkets.com.

Until next time…

Safe trading,