Stock Ratings come in many shapes and forms, but they should always be the result of rigorous studies and not simply guess work or even worse, a pure sales pitch.

By analyzing the variety of existing ratings on the market we can create four broad rating categories - quality, risk, outlook and marketing:

Stockmarks^TM is an unique example of an innovative investment tool inspired by Warren Buffett's investment philosophy, according to which a good company is one with a good business, good management and a fair price. The StockMarks™ quality cubes combine these factors using a new metric in a multi-dimensional analysis developed by our founder to derive a company’s fitness on a scale from 0 (worst) to 100 (best). The determining sub-ratings use the same scale and include:

Business StockMark (SMB) - measures a company's business quality through a set of variables such as: operating margin, sales elasticity and sales growth rate.

Management StockMarkg (SMM) - measures a company's management quality based on the following key indicators: return on assets, earnings per employee and the earnings growth rate.

Price StockMark (SMP) - gives a company's price quality rating in terms of undervaluation reflected by valuation measures such as price to book, price to sales per share and price to earnings per share.

Each of these three ratings are available daily for over 5500 stocks in the USA and for more than 6000 companies in ten other countries.
So far we are not aware of any other rating system that tries to measure fitness as opposed to sickness. Should you know of any please let us know and we will publicize it here.

Periodic health check-ups based on different measures of risk are the most common types of ratings used by bankers and investors. Broadly speaking, they may be grouped in two subcategories: default risk and market risk.

Default risk (credit) ratings
Ratings measuring the extent to which an issuer can meet his payment commitments. Such ratings are generally offered by rating agencies such as Moody's or Standard&Poor's. But they can also vary according to the commitments' maturity:

• Bankruptcy risk

Long term credit ratings (with maturity above 365 days), usually take into account: the likelihood of payment, nature and provisions of the commitments and protection afforded in the event of bankruptcy, reorganization or other arrangements. Below we present a table with the ratings used by some of the most important rating agencies: Standard and Poor's and Moody's.

• Liquidity risk

Short term issue credit ratings (with maturity less than 365 days). An obligor should meet the same prerequisites as for the long term rating, with the only difference that the focus is on a shorter period. This rating is an alert for the reversals in the long term ratings and therefore should be carefully monitored. For better understanding of these ratings we present below another comparative table based on the same two agencies, with credit quality ranging from highest to lowest.

It is important to remember that these ratings do not represent recommendations to buy or sell. Also, their accuracy is totally dependent on the sources of information used, therefore, it can not be guaranteed.

Market risk ratings
Market risk ratings use different risk indicators to measure the price risk associated with a certain stock.

• Volatility risk ratings

Such ratings include SADIF's Volatility StockMark and RiskGrades  from RiskMetrics. Both ratings combine the historical movements of the company's stock price with other risk factors. SADIF's Volatility StockMark (SMV) is scaled from 0 to 100 and gives us the standardized volatility risk of a stock as compared to that of the market.

• Risk alerts

Risk alerts are usually generated by screens that filter companies that meet the normal limits of the specified indicators in the predefined screens. SADIF's DueDilligence™ (DD) rating is one of the most comprehensive and trustworthy tools to spot the weaker stocks in a peer group or in a portfolio. It combines fundamental and technical indicators and relies on SADIF's quality ratings (both individual and global), comparing the performance within the same peer group. A company's risk is based on the scoring of a set of variables to assess the companies position in terms of:

• Quality
• Diversification
• Profitability
• Financial strength
• Momentum
• Valuation
• Price manipulation
• Scam exposure

Until recently, Reuters was another such rating provider and among the risk alerts screens available we distinguished: rating downgrades, estimate revisions, short selling, institutional selling, relative price deterioration, etc.   

By momentum we understand the rate to which a stock's price moves upwards or downwards. Ratings based on momentum are usually delivered through:
 

Stock pick lists (for both buy and sell). The main feature of such ratings is that they are for short term puposes only and care should be taken before deciding to buy or sell based on these lists. They should always be acompanied by a quality rating, such as SMT and a risk rating like SADIF's DueDilligence™ scoring. SADIF's Auto-Pilot™ is such a product. It delivers daily the Top 10 and Bottom 10 stocks in the selected market based on a specified strategy. IBD's SmartSelector is another example of momentum ratings. Its CorporateRating based on earnings per share, relative price index, industry group relative strength, sales, profit margins, return on equity and percentage owned by institutionals untangles the market universe and publishes the IBD®100 list.

Popularity ratings (upgrades/downgrades). These ratings are intended to draw attention to companies that received an upgrade or downgrade, usually from the research analysts covering them. It is believed that such ratings are in themselves an alert so as to know the tendencies of a stock's price movements. The highlighted company looses (gains) more attractivity after receiving a downgrade (upgrade). Examples of these ratings are 'ZacksAdvisor' and SADIF's Outperformance StockMark (SMO).

Movements on top lists and Industry awards such as “Most Innovative Employer” are sometimes taken by investors as signals to buy/sell particular stocks.  An example of such lists/awards include the Euromoney awards. However, by nature they are backward-looking and there is no clear link between such awards and future stock returns.

In conclusion, several types of ratings should be combined in the most efficient way to best serve our interest.  An emphasis should be placed on quality since it is the strongest and most reliable long term measure of a company's outlook.

If you want to read more about stock ratings visit the following links:

• Stock Ratings: The Good, The Bad And The Ugly
• Business Week Online