The model is designed so that at any time and for whatever stock universe considered, the model will extract the ca. 10% of stocks that look most worthy of your attention. These represent a pool of “interesting research candidates”, a natural hunting ground for active (long) investors regardless of style and attitude toward risk. For a stock to enter this pool, it needs to have a solid base score (above 7.5, or 6.5 for financials) and no provocative characteristics (such as red flag, an exit alert, a very low fitness, value, momentum, or brokers scores, a trailing residual performance that is extremely low, a controversy score that is extremely high, etc.). Interesting research candidates with a high recession score are also categorised and tracked as “recession-resilient candidates”, whereas all the stocks with a recovery score (ie. bottom 10% performers of the past year) are represented as “Recovery candidates”. High score stocks (above 8.5, or 7.5 for financials) with any provocative characteristics are reported as “High Octane”. These normally account for 5-10% of the stock universe considered. As one would expect (see graph below), the likelihood of spectacular returns with stocks falling in this category is high, but so too is the range of possible outcomes. Given that the median outcome is similar than with regular candidates but with much higher uncertainty, caution (or extra knowledge) is advised before taking positions in any of them.
“Potential Shorts” typically account for another 2-5%. Their identification partly mirrors that of long candidates (e.g. low base scores, no green flag) but also accounts for the stock’s recovery score, thereby preventing shorting a stock that may be too liable to a rally. As with High Octane stocks, shorting is a high-risk investment strategy that demands extra work and skill.All the other stocks, and therefore most of the universe (75%+ of the names), end up as “Better Odds Elsewhere”. What this means is that the model hasn’t found a reason to alert investors on the high likelihood of outperformance (or underperformance) for any of these stocks. In turn, this absolutely doesn’t mean that one shouldn’t be investing in any “Better Odds Elsewhere” stocks – as the graph below shows, there was still plenty of scope for outperformance in this category in 2017, albeit with lesser odds than with candidates.