Stocks, like workers, have to be assessed from time to time. Financial updates change a stock's performance and outlook at least once a quarter, if not more frequently. But analyzing dozens of financial bits of information can be a tad too much to handle for an investor trying to make money in the stock market.
But what if there was a way to capture some of that information, compare it with thousands of other stocks and generate a single letter grade based on the results?
IBD's Sales+Margins+Return on Equity Rating — or SMR Rating for short — does exactly that. It cuts through the nitty-gritty of financial details of a company to present an assessment of these important fundamentals.
These Are The Five Best Stocks To Buy Or Add To A Watchlist Now
Investor's Business Daily research shows that winning stocks usually report quarterly earnings growth of at least 25%. But profitability can be measured in different ways.
The SMR Rating calculates the company's sales over three quarters and measures the quality of profitability through pre- and after-tax margins. This way, the rating compares how much of each dollar in sales goes to earnings.
The SMR Rating calculates after-tax margins on a quarterly basis but measures the return on equity and pretax margins using the annual report.
For calculating the return on equity (ROE), the rating divides net income (income before dividends) by the average shareholders' equity over the two most recent fiscal years. ROE shows how well the company is using shareholders' capital.
Palantir's Top SMR Rating
A stock gets a letter grade from A to E based on the results. An A rating shows the stock is among the top 20% in the IBD database for this metric. But both A and B are equivalent to "pass" on the assessment. Also, if any of the measures shows accelerating growth, the SMR Rating will take that into account.
The SMR Rating sidesteps stocks' market performance by examining just key items in a company's balance sheet and income statement.
The rating's strength is also its weakness. Stocks reflect the market's powerful discounting mechanism as well as their own fundamental performance and it is not uncommon to find stocks with poor SMR Ratings rallying to new highs because of speculative trading.
Some of these eventually become stock market leaders. But then there are others that later sputter and die because there was no fundamental strength to start with.
Use the rating with other tools that track the stock's performance, such as the Relative Strength Rating and tools such as the relative strength line and moving averages. An understanding of base patterns and buy points is also valuable.
The SMR Rating is part of a stock's overall Composite Rating. It can be found on IBD MarketSurge, IBD Stock Checkup, IBD's stock tables and IBD Leaderboard charts.
Discover Top Growth Stocks With IBD Leaderboard
You should expect an institutional-quality company like Palantir to have a strong SMR Rating. Indeed, its rating is currently an A and had that highest-possible mark even on Jan. 27, when many tech stocks sold off. On Tuesday, Palantir soared to new highs on a bullish earnings report.
Please follow VRamakrishnan on X/Twitter for more news on the stock market today.
