The proper research of a stock investment looks into company fundamentals, industry leadership, institutional demand and the stock's performance. That could be hours of work, but a tip for how to invest: The IBD Composite Rating does most of the work for you.
Consider the rating an initial screening tool in how to invest in winning stocks. The rating serves an important purpose in the first two pillars of The IBD Methodology.
The Composite is sort of a rating of ratings. It combines five IBD proprietary ratings that measure the most important fundamental and technical criteria that define winning stocks. Specifically, it includes the Earnings Per Share Rating, Relative Price Strength Rating, Accumulation/Distribution Rating, SMR Rating and Industry Group Relative Strength Rating. The stock's percentage off its 52-week high is also incorporated.
The EPS and RS Ratings are weighted heavier than the others because earnings and stock performance are better predictors of future stock performance.
The Composite, EPS and RS Ratings have scales of 1 to 99, with 99 being the best. These ratings compare stocks to each other on a relative basis. For instance, a stock with a 95 score ranks in the top 5% of stocks in IBD's database. Look for stocks with Composite scores of 90 or above.
The Composite Rating is listed on IBD MarketSurge charts and in the IBD Stock Checkup.
How To Invest: Using The Composite Rating
Once you've identified a stock with a high Composite Rating, it's time to analyze each of the five ratings on their own merit.
- The EPS Rating combines the growth and stability of a company's earnings over the past three to five years, with extra emphasis on the two most recent quarters.
- The RS Rating measures a stock's price performance over the past 12 months compared to all stocks that IBD tracks.
- The Accumulation/Distribution Rating tracks the level of institutional buying and selling over the last 13 weeks. The scale runs from A+ to E, with A+ indicating heavy buying and E represents heavy selling.
- The SMR Rating incorporates a company's sales growth, profit margins and return on equity. The SMR Rating scale ranks from A to E where A represents the top 20% of companies in the IBD stock universe.
- A stock's Industry Group Relative Strength Rating compares a stock's group with the other 196 groups IBD tracks over the past six months. It uses an A+ to E scale.
Other Elements Of Stocks To Buy
The Composite Rating won't help with some parts of how to invest. For example, IBD research has found that three out of four stocks follow the general market direction. Readers can check The Big Picture to get market direction info.
Lastly, choose a stock that is breaking out past a proper buy point of a base, such as a cup-with-handle or flat base. And earlier stage base breakouts tend to have higher success rates than third- or fourth-stage bases.
IBD 50 stock Ryan Specialty Holdings offers an example of how a well-researched stock can outperform. It broke out of a cup-with-handle base on June 3 and climbed more than 20% from its 56 buy point. The Composite Rating was 97 at the time of the breakout.
Follow Kimberley Koenig for more stock market news on X/Twitter @IBD_KKoenig.
