Our FC Stock Signal allows you to quickly see where each company is positioned in the market. Each day we rank each company in the market using metrics which represent the following factors:
We use a traffic light signal system to give you a snapshot of where each company is positioned in the market.
What is it saying?
A green light tells you the company is within the top three deciles of the market (i.e. the best 30%). Companies within this category have historically outperformed.
A red light tells you the company is in the bottom three deciles of the market (i.e. the worst 30%). Companies within this category have historically underperformed.
An orange light is the remaining 40% of the market and is neutral.
How do I read it? Give me an example.
Looking at Pushpay’s FC Stock Signal above you can see it is green. This tells you that the company is within the top 30% of the market for the combined ranking of the five metrics. Overall, these companies have outperformed the market as a whole so this is good news.
On the other hand, Pushpay’s valuation is relatively high on a price-to-sales basis (i.e. a red light means the company is in the top 30% of the market on a PS ratio basis). This is a concern as companies with high relative valuations have historically underperformed the market. However, the question it provokes is whether or not Pushpay’s growth is capable of exceeding the growth expectations built into this valuation. It is possible and so this signal is a prompt for further investigation.
Looking at the Pushpay’s gross profit to asset ratio, you can see a green light. This tells you that Pushpay is efficiently using its assets to generate profits (it is in the top 30% of the market for this metric). Companies in this category tend to outperform the market.
The dividend yield signal is a simple yes/no. As Pushpay’s signal is red, it tells you that the company doesn’t pay a dividend. Companies which pay dividends tend to outperform ones that don’t (on the NZX and ASX anyway).
Pushpay generates higher returns on capital than most other companies in the market. Companies with higher return on capital have historically outperformed the market.
Pushpay’s three-month stock price volatility is within the market norm. Companies with low stock price volatility have historically outperformed the market while companies with high volatility tend to underperform.
Testing the FC Stock Signal
We have tested our stock signal on different markets over different time periods. We have done this for each metric independently as well as combining the metrics to generate our signal.
How does it perform?
Our engine splits the market into ten equal parts (i.e. deciles). It rebalances each decile annually. Companies within deciles 1 to 3 are “green lights” while companies 8-10 are “red lights”.
The chart below ranks all the companies on the New Zealand Stock Exchange by the FC Stock Signal. You can see that companies in deciles 1, 2, and 3 have outperformed companies in deciles 8, 9, and 10.
The performance of our FC Stock Score looks like this when tested on the Australian stock exchange. You can see companies in deciles 1,2, and 3 outperform companies in deciles 8, 9, and 10.
Lastly, we ranked the Nasdaq using our FC Stock Signal. The performance can be seen below with companies in deciles 2 and 3 are performing the best and companies in decile nine and ten performing the worst.
The implication of our analysis is that companies in deciles 1, 2 and 3 will outperform companies in deciles 8, 9, and 10. This seems to be the case. However, it doesn’t necessarily mean that it will be the case. Just as equities as an asset class have historically outperformed other asset classes, doesn’t necessarily mean they will in the future.
Finally, it is important to note that our FC Stock Signal doesn’t take individual company risk into account. This work still needs to be done.