Stock & Bond Ratings Definitions

 

STANDARD & POOR’S “STARS” RANK

The S&P Stock Appreciation Ranking System (STARS),  measures short-term (six- to 12-month) appreciation potential of stocks. STARS performance is measured against the performance of S&P 500 for US stocks.

  • 5 Stars (Strong Buy)
    Total return is expected to outperform the total return of the S&P 500 Index by a wide margin, with shares rising in absolute price
  • 4 Stars (Buy)
    Total return is expected to outperform the total return of the S&P 500 Index with shares rising in absolute price.
  • 3 Stars (Hold)
    Total return is expected to closely approximate that of the S&P 500 Index, with shares generally rising in price.
  • 2 Stars (Sell)
    Total return is expected to underperform the total return of the S&P 500 Index, and share price is not anticipated to show a gain.
  • 1 Stars (Strong Sell)
    Total return is expected to underperform the total return of the S&P 500 Index, with shares falling in absolute price.

For Europe, the same holds, but the appropriate benchmark is the Europe 350 Index. For Asia, the appropriate benchmark is the S&P Asia 50.

 

STANDARD & POOR’S EARNINGS & DIVIDEND RANK

The Standard & Poor’s Earnings and Dividend Ranking System measures the historical growth of earnings and dividends.

The starting point in the ranking process is a computerized scoring system based on per-share earnings and dividend records over the most recent 10-year period, a time period sufficient to measure a company’s performance under varying economic conditions. The system measures growth, stability within the trendline, and cyclicality. From these, scores for earnings and dividends are determined. The system makes allowances for company size, since large companies have certain inherent advantages over smaller ones.

Once computed, a final score is measured against a scoring matrix. The results are reviewed and sometimes modified, because no mechanical system can evaluate the many special considerations that could effect a company’s earnings and dividend record.

The Standard and Poor’s Earnings and Dividend Ranking System has seven grades:

  • A+, A, and A- are above average
  • B+ is average
  • B, B-, and C are below average
  • An NR designation (no ranking) is given to common stocks with insufficient historical data or because the stock is not amenable to the ranking process. As a matter of policy, Standard & Poor’s does not rank the stock of foreign companies, investment companies, or certain finance-oriented companies.
  • D signifies a company in reorganization.

 

STANDARD & POOR’S FAIR VALUE RANK
The price at which a stock should sell today as calculated by Standard & Poor’s  using a quantitative model based on the company’s earnings, growth potential, return on equity relative to the S&P 500 and its industry group, price to book ratio history, current yield relative to the S&P 500, and other factors. The current fair price is shown given today’s S&P 500 level. Each stock’s fair value is calculated weekly

 

WRIGHT QUALITY RATING:

The Wright Quality Rating, measures the overall investment quality of a company.

Wright Quality Ratings are based on numerous individual measures of quality, grouped into four principal components:

  1. Investment Acceptance (i.e. stock liquidity),
  2. Financial Strength,
  3. Profitability & Stability, and
  4. Growth.

The ratings are based on established principles using 5-6 years of corporate record and other investment data.

The ratings consist of three letters and a number. Each letter reflects a composite qualitative measurement of numerous individual standards which may be summarized as follows:

  • A = Outstanding;
  • B = Excellent;
  • C = Good;
  • D = Fair;
  • L = Limited;
  • N = Not Rated.

The number component of the Quality Rating is also a composite measurement of the annual corporate growth, based on earnings and modified by growth rates of equity, dividends, and sales per common share. The Growth rating may vary from 0 (lowest) to 20 (highest).   The highest quality rating assigned by Wright is AAA20.

 

THOMPSON REUTERS “STAR MINE” EQUITY SUMMARY SCORE:

The Equity Summary Score and associated sentiment ratings by StarMine are:

  • 0.1 to 1.0 – very bearish
  • 1.1 to 3.0 – bearish
  • 3.1 to 7.0 – neutral
  • 7.1 to 9.0 – bullish
  • 9.1 to 10.0 – very bullish

An Equity Summary Score is only provided for stocks with ratings from four or more independent research providers.

The ratings are ratings of relative, not absolute forecasted performance. The Equity Summary Score model has only been in production since August 2009 and therefore no assumptions should be made about how the model will perform in differing market conditions

The score is calculated by normalizing third-party research providers’ ratings distributions (making them more comparable) and weighting each provider’s rating in the final score based on historical accuracy. Equity Summary Scores for the 1,500 largest stocks by market capitalization are force ranked to help ensure a consistent ratings distribution. … smaller cap stocks are then slotted into this distribution without a force ranking.

 

FIRST CALL CONSENSUS RECOMMENDATION (“STREET CONSENSUS”)

First Call Consensus Recommendation is provided by Thomson Reuters, using information gathered from contributors. For each security where there is a consensus recommendation, the number of contributors is provided with the recommendation. The Thomson Reuters standardized scale is as follows:

  • 1 – Strong Buy
  • 2 – Buy
  • 3 – Hold
  • 4 – Underperform
  • 5 – Sell

Each contributor determines how their individual recommendation scale maps to the Thomson Reuters First Call 5-point scale.

 

VALUE LINE RATING

Timeliness 

The Value Line Timeliness Rank measures probable relative price performance of the approximately 1,700 stocks during the next six to 12 months on a scale from 1 (Highest) to 5 (Lowest).

The components of the Timeliness Ranking Systeminclude factors such as the 10-year trend of relative earnings and prices, recent earnings and price changes, and earnings surprises. All data are actual and known.

  • Rank 1 (Highest): These stocks, as a group, are expected to be the best performers relative to the Value Line universe during the next six to 12 months (100 stocks).
  • Rank 2 (Above Average): These stocks, as a group, are expected to have better-than-average relative price performance (300 stocks).
  • Rank 3 (Average): These stocks, as a group, are expected to have relative price performance in line with the Value Line universe (approximately 900 stocks).
  • Rank 4 (Below Average): These stocks, as a group, are expected to have below-average relative price performance (approximately 300 stocks).
  • Rank 5 (Lowest): These stocks, as a group, are expected to have the poorest relative price performance (100 stocks).

Safety

A second investment criterion is the rank for Safety that is assigned by Value Line to each of the approximately 1,700 stocks. This rank measures the total risk of a stock relative to the approximately 1,700 other stocks. It is derived from a stock’s Price Stability index and the Financial Strength rating of a company. Safety ranks are given on a scale from 1 (Highest) to 5 (Lowest) as follows:

  • Rank 1 (Highest): These stocks, as a group, are the safest, most stable, and least risky investments relative to the Value Line universe.
  • Rank 2 (Above Average): These stocks, as a group, are safer and less risky than most.
  • Rank 3 (Average): These stocks, as a group, are of average risk and safety.
  • Rank 4 (Below Average): These stocks, as a group, are riskier and less safe than most.
  • Rank 5 (Lowest): These stocks, as a group, are the riskiest and least safe.

Stocks with high Safety ranks are often associated with large, financially sound companies; these same companies also often have somewhat less-than-average growth prospects because their primary markets tend to be growing slowly or not at all. Stocks with low Safety ranks are often associated with companies that are smaller and/or have weaker-than-average finances; on the other hand, these smaller companies sometimes have above-average growth prospects because they start with a lower revenue and earnings base.

 Financial Strength Rating

A relative measure of financial strength of the companies reviewed by Value Line. The relative ratings range from A++ (strongest) down to C (weakest), in nine steps.

 

MOODY’S GENERAL LONG-TERM CREDIT RATINGS:

Moody’s long-term obligation ratings are opinions of the relative credit risk of fixed-income obligations with an original maturity of one year or more. They address the possibility that a financial obligation will not be honored as promised. Such ratings use Moody’s Global Scale and reflect both
the likelihood of default and any financial loss suffered in the event of default.

  • Aaa Obligations rated Aaa are judged to be of the highest quality, with minimal credit risk.
  • Aa Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.
  • A Obligations rated A are considered upper-medium grade and are subject to low credit risk.
  • Baa Obligations rated Baa are subject to moderate credit risk. They are considered medium grade and as such may possess certain speculative characteristics.
  • Ba Obligations rated Ba are judged to have speculative elements and are subject to substantial credit risk.
  • B Obligations rated B are considered speculative and are subject to high credit risk.
  • Caa Obligations rated Caa are judged to be of poor standing and are subject to very high credit risk.
  • Ca Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.
  • C Obligations rated C are the lowest rated class of bonds and are typically in default, with little prospect for recovery of principal or interest.

Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.

 

STANDARD & POOR’S LONG-TERM CREDIT RATINGS

The general meanings of the credit rating opinions are:

  • ‘AAA’—Extremely strong capacity to meet financial commitments. Highest Rating.
  • ‘AA’—Very strong capacity to meet financial commitments.
  • ‘A’—Strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances.
  • ‘BBB’—Adequate capacity to meet financial commitments, but more subject to adverse economic conditions.
  • ‘BBB-‘—Considered lowest investment grade by market participants.
  • ‘BB+’—Considered highest speculative grade by market participants.
  • ‘BB’—Less vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial and economic conditions.
  • ‘B’—More vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial commitments.
  • ‘CCC’—Currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments.
  • ‘CC’—Currently highly vulnerable.
  • ‘C’—Currently highly vulnerable obligations and other defined circumstances.
  • ‘D’—Payment default on financial commitments.

Ratings from ‘AA’ to ‘CCC’ may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.

FacebookLinkedInEmail

Comments are closed.