Extending the Value of Our Proven Weiss Ratings Model

Mike Larson

We’ve long known that the Weiss Ratings Model gives us insights to a company’s future prospects, but I’m also finding we can use it to gauge the health of the general market. Let me explain…

First, the foundation: Our model assesses a company’s fundamental information as it pertains to growth, solvency, efficiency, volatility, valuation, and shareholder wealth.

In total we look at seven different factors which have numerous sub factors. For instance, one factor is valuation, but that is a roll-up from sales, book (common equity), earnings, and Ebitda (operating earnings) sub factors, that combine with price, market cap and enterprise value. Those sub factors roll up to a letter grade rating such as “A+”. Then these higher level factors are assessed in relation to a company itself, both currently and historically, and also in relation to its industry peers, both currently and historically.

That is just one of the seven factors, and it takes hours to crunch the 15,000 plus securities across all of the factors to help investors make decisions on the stock’s ability to outperform.

But it works. If you had purchased a basket of the top ‘A’ rated stocks in 2010 and rebalanced them monthly, you’d be up 328% through the end of 2016, vs. a gain of just 134% for the S&P 500. On the other hand, if you did the same exercise with ‘D’ rated stocks, you’d have made just 18% over those seven years.

There’s no doubt the Model does what it’s supposed to for individual companies. But it doesn’t end there. The stocks, if assessed properly, can give you valuable insights about the sum of the parts, or the total stock market. We can use our Ratings Model to give us a pulse on the market and economy.

Take for instance, the numbers of stocks in the ‘Buy’ group (A’s and B’s), ‘Hold’ group (C+ to C-) and the ‘Sell’ group (D+ and lower) and look at those historically vs. the S&P 500 and compare during the time of a recession.

You can see that during the recession, our Ratings Model downgraded stocks from ‘Buys’ and ‘Holds’ to ‘Sells’. There was a panic, confidence sank, and investment in future earnings dropped. Company fundamentals looked horrible, and the stock market sank by over 60%. Our Model did what it was supposed to.

Now, compare that to a more recent time frame, starting at the end of 2014. The number of ‘Buys’ started to dwindle yet again, and Sell’s started to gain more upside momentum. Oil prices were tanking, and in some sectors, stocks were in free-fall. But the interesting thing is that the ‘Holds’ didn’t lose nearly as much momentum, meaning stocks that were ‘Buys’ weren’t being forced to the ‘Sell’ category nearly as fast as we had seen during the “Great Recession” (light gray shaded area), back in 2008-2009. Instead, ‘Buy’ rated stocks were put on ‘Hold’. The alert to see those didn’t materialize.

Under the hood, that means we didn’t see the same deterioration in underlying company fundamentals that we saw in 2008. Thus, despite the violent swings, which we can now just chalk up to a shifting of bets, the market’s internals were still good in terms of company performance. Furthermore, we would have not have been caught in cash as the market regained footing and headed to all time new highs once again.

Well, I’m a believer, and I will continue to use the Weiss Ratings Model to help let me know when we’re enduring a garden variety correction, or a dangerous, value eroding downturn like we saw in 2008. I’ve always looked at our Model to analyze stocks, but now, I’m finding it more and more helpful in understanding the general health of the market.

For now, we’re in good shape and a poised to continue to rally. If we see a breakdown with both buy and hold rated stocks deteriorating to sell, then we may want to take pause. If you’re one of my subscribers to the Top Stocks Under $10, you’ll be the first to know.

Best wishes,


Mandeep Rai, Senior Analyst

Small Cap Edition, By Mandeep Rai, Senior Analyst

Mandeep Rai has more than 15 years of investing experience, working as both a stock and credit analyst. At Weiss Ratings, he researches and evaluates financial and economic themes, and makes decisions on when to buy or sell specific shares for the Top Stocks Under $10 portfolio.

About the Senior Analyst

Mandeep spent six years on the NYSE trading floor and worked in private equity valuations for General Electric. Today, he mines the vast Weiss database to formulate investment and trading strategies for stocks, ETFs and cryptocurrencies. His strategies boast a proven track record of significantly outperforming the benchmarks.

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