Earnings Quality Index
Quality of earnings analysis is a key component of many institutional money managers’ stock selection process. There is a long history of research and empirical evidence that supports the notion that high earnings quality companies (i.e., companies with robust cash flow generation relative to reported earnings) outperform their peer groups and market average over time. And, the inverse is true; low EQ firms tend to underperform over time.
Leveraging our vast experience in developing forensic accounting models (we produced the first known commercial earnings quality factor for the US and also for Europe), we have developed robust domestic and global earnings quality indexes. We created straightforward Earnings Quality variables that are transparent but uniquely relevant for different types of firms (including financials) and then weighted the firms by their EQ ranking. Alternative weighting schemes can be considered as well (i.e., adjusting a market cap weight for earnings quality).
Portfolio Strategy based on StockScouter scoring system
Created in 2001, StockScouter is a widely-followed stock-ranking system designed, created and maintained by Verus and deployed on Microsoft’s MSN Money website. StockScouter page views are approximately 855,000 per month and editorial articles using StockScouter content and results produce 1.5 million page views per month.
The StockScouter System scores stocks 10 to 1 based on a combination of fundamental, valuation, technical and ownership components.
Relative to the S&P 500, a back test of the top 50 and top 100 large cap portfolios, using semi-annual rebalancing, demonstrated annualized excess returns of 440 bps and 310 bps respectively, with comparable volatility (Jan '96 - Sep '14).
Portfolio Strategy based on Verus Opinion scoring system
The Thomson Reuters Company-in-Context report is the most popular equity tear sheet (by a factor of 2) carried on Fidelity Investment's retail brokerage platform. The Verus Opinion score, included in the Company-in-Context report, is based on a combination of earnings quality, technical and valuation analysis, and an evaluation of the insider transactions. For 20 of the past 21 quarters, Integrity Research has ranked the Verus Opinion as the best performing stock-ranking system on Fidelity's platform.
Relative to the S&P 500, a back test of equal-weight top 50 and top 100 ranked large cap portfolios demonstrated annualized excess returns of 660 bps and 510 bps respectively, with comparable volatility (Jan '96 - Sep '14).