Flags act as early detection signals to complement the slower moving nature of base scores. The odds of out (under) performance rise for stocks that combine high (low) scores and a green (red) flag. Yellow flags warn investors about stocks that have performed extremely well over the past year and appear to offer relatively poor value, thereby increasing the risk of stagnating or even declining (relative) returns.

Flags

Flags act as an override or an enhancer of the signal provided by the base score. Being calibrated for long-term investing, most base scores tend to change little month over month, with typically only around 10% of stocks seeing their base score change by more than +/-2.5 points over a period of 3 months. Flags act as an early detection signal. Stocks are assigned a green flag when the rate at which both their base score and their performance are rising stand out relative to all other stocks in their regional universe. Conversely, stocks whose base scores and performance are both dropping distinctively fast are assigned a red flag. There are other conditions for red flags such as having an extremely high value score and an extremely low momentum score (aka “cheap for a reason” stock). Finally, amber flags are assigned to stocks that have significantly outperformed over the past 12 months and whose value scores are below average, which does somewhat raise the odds either of profit-taking and relative underperformance.

Flags are by nature a more volatile signal than base scores, witnessing 50% to 75% churn over a period of 3 months. Their appearance does however carry useful information that can stretch over the following 12 months (see graph above), and their informational value is compounded when aligned with the base score signal, as illustrated in 2017 where 78% of all green flagged stocks with a high base score as of Jan-17 ended up significant outperformers over the following year (likewise 72% of all red-flagged with a low base score underperformed significantly).