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The BI Ranking System
The BI Ranking System was originally developed in the 70’s and is based on a weighted average of 11 factors, each of which has been determined to have some correlation with the movement of stock prices. Quantitative scores for each factor are weighted according to the intensity of that correlation as reflected in past experience. Logic would say that stocks which rank highest overall on these 11 factors would outperform other stocks. And this has proven to be the case. These factors are:
· The percentage earnings increase projected over the next year and next two quarters
· Relative earnings growth persistence
· Relative price strength
· Earnings growth expected over the next 4 years
· Change in earnings estimates
· PE to growth rate ratio
· "Solution to the Problem" status
· "Black Cloud/White Cloud" index (For example, soaring oil prices would drag a black cloud over trucking stocks)
· Takeover candidate?
· Wall Street sentiment and insider trading
· Financial strength (balance sheet)
The relative weightings are, of course, proprietary and, as you can see, the factors are to some degree relative quantifications of judgments. But therein lies one of the advantages of the BI Ranking System - you just can’t capture the stock market with numbers. Indeed, a psychologist might fare as well on Wall Street as a stock maven.
The system was developed by the editor at Cornell University while earning his MBA back in 1973-74 and has undergone periodic adjustment and improvement since that time. Past study has indicated that a rank over 7.0 is an acceptable Buy while stocks ranked 4.0 or less should not only be sold/avoided, but might prove worthy turf for finding short sale candidates. Furthermore, stocks ranked in the 8 to 9 area outperform stocks ranked in the 6 to 7 range and stocks ranking over 10.0 have on average outperformed all other stocks. Unfortunately, stocks ranked over 10 are difficult to come by - often just a few each year. One performance enhancing strategy is to overweight stocks ranked 9.0 or higher.
To help BI Research subscribers follow the BI Ranks of the stocks we cover, the first line of each stock’s update contains the most recent rank. It is not a cure-all and a sudden news release can send the stock and its BI Rank reeling, or soaring… but that’s the stock market for you. Using the BI Ranks has given us our past performance edge. The Hulbert Financial Digest has frequently ranked BI Research among the top 5 investment newsletters for its long term performance.