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Quant Ratings: Why pick stocks when somebody else can do it for you?

  • 4-min read

Spent some time on SeekingAlpha or TheStreet recently and thinking about opening your wallet to invest some hard-earned cash? Start here first and learn how quant ratings can help you make an informed purchase decision.

Quant Ratings: Are They Really Worth Your Money?
Quant Ratings: Are They Really Worth Your Money?

Since the dawn of time, humans have gravitated toward paying other people to do their undesirable tasks. I learned this at age 10 when my neighbor conned me into shoveling his driveway for five bucks. It turns out that when it comes to investing, things are no different. 

After all, who has the time to read a 10K report, listen to earnings calls, and do a discounted cash flow (DCF) model for every stock in their portfolio? Very few people, it seems. Unless you’re an equity analyst, in which case it’s literally your job.

Naturally, organizations have capitalized on investors’ disdain for pouring over quantitative data, offering instead to do it for them for a fee. These firms employ humans—and create algorithms—to analyze company data and develop quant ratings.

What is a quant rating?

A quant rating is simply a score assigned to a stock based on the calculations of various mathematical or algorithmic models.

It generally excludes or assigns less weight to an analyst’s personal opinion and qualitative factors, such as management, economic moat, or competition. 

While the calculations, factors, and weightings differ from service to service, all quant ratings share a similar objective: They attempt to distill multiple complex quantitative factors into a recommendation to buy, sell, or hold a stock. In many ways, quant ratings perform the same function that Wall Street analysts do for a living, but on an automated basis. 

A quant rating can be based on fundamental analysis, such as a company’s financial ratios, accounting statements, and earnings figures. It can also be based on technical analysis, such as a stock’s momentum, trends, and patterns. Regardless of their methodology, quant ratings attempt to take the emotion out of investing, reducing decisions to a simple yes or no, based on statistics. 

What are some of the leading quant rating services?

First up is TheStreet’s Quant Ratings, founded by the legendary Jim Cramer. This is an online service that issues recommendations on stocks based on a proprietary quantitative and algorithmic stock screener that assesses 32 data points. 

TheStreet provides recommendations for buying, holding, or selling more than 4,300 stocks, and includes a custom stock screener and unlimited daily research reports. An annual subscription costs about $50.

Another popular option is Seeking Alpha’s Quant Ratings. This service picks stocks that exhibit strong value, growth, profitability, EPS revisions, and price momentum metrics compared to their peer sector. The strategy is backtested to 2010 using historical price data, and also undergoes daily simulated trading to assess current performance. 

Seeking Alpha recommends its service for both short- and long-term investors, and offers a basic subscription with limited access to its quant ratings. A premium subscription with unlimited access to ratings costs about $240 a year.

Example of a quant rating

Here is TheStreet’s latest quant rating report of Boeing Company (NYSE:BA) as of March 31, 2022. The publicly available report consists of four main tabs:

  1. Rating Summary: Contains the latest price target and recommendation. Stocks are graded from A+ to F, and labeled as either Buy, Sell, or Hold. 
  2. Rating Detail: Contains various scores from one to five on the stock’s growth, total return, efficiency, price volatility, solvency, and income. An explanation of the research behind these scores is also available.
  3. Financial Analysis: Contains different financial ratios for the company’s income statement, balance sheet, debt, profitability, share data, and valuation metrics.
  4. Peer Group: Compares various data points to other companies in its industry.

Are quant ratings a reliable measure of equity performance?

Is Seeking Alpha’s quant rating accurate? The company says that when using a backtested strategy, its “strong buy” stock picks have beaten the S&P 500 every year since 2010. In other words, if you had invested according to their “strong buy” picks from 2010 until now, you would have achieved an annualized 27% return, compared to the S&P 500’s 10% return.

In reality, the old adage of “past performance does not guarantee future performance” applies here. Relying on backtested results is akin to driving using the rearview mirror.

Validating a strategy by relying on historical data is a useful tool for checking assumptions, but should be used with caution when trying to predict future outcomes. What worked in the past isn’t always guaranteed to work tomorrow.

Is a Seeking Alpha premium subscription worth it for the Quant Rating service? Possibly. The excess time, energy, and knowledge an individual would have to spend analyzing dozens of different stocks and keeping up with the news is saved by relying on quant ratings. An automated service like quant ratings could be beneficial for hands-off investors who want a shot at beating the market with minimal effort beyond some light reading every day. 

The final word on quant ratings

If you fancy yourself somewhere between an active stock picker and a hands-off index fund investor, a quant rating service could be a good resource. These services aren’t terribly expensive, and the chance to beat the market might be worth it. If you enjoy following the markets and reading up on stocks, you may find their daily reports and updates insightful and worthwhile.

The biggest benefit of quant ratings is the ability to take emotions out of the picture. Mechanically following the recommendations of an algorithm to buy, hold, or sell could prevent you from making rash investment decisions. For many investors, avoiding personal investing biases may be the secret to bigger returns.