To compute an overall score, Quadrix uses a weighted average of the seven category scores, with value, quality, and momentum receiving the biggest weightings. Based on past effectiveness or expectations regarding market conditions, weightings for the more than 100 individual variables or the seven categories may be changed. To compute momentum scores, Quadrix ranks the universe of more than 4,500 stocks on 10 variables related to near-term growth in earnings, cash flow, and sales. For each of the momentum variables, each stock is compared to the universe of all stocks. To calculate the momentum score, the sum of a stock s scores for each variable is compared to the universe of stocks.
Many investors rely solely on momentum factors when picking stocks.
But Quadrix prefers a more balanced approach, partly because companies with high momentum scores often have overvalued stocks. Also, because our momentum variables look back no further than 12 months, momentum scores can unduly reward companies experiencing a temporary acceleration in business. Still, partly because it can help eliminate companies suffering from deteriorating fundamentals, momentum receives a healthy weighting in the Quadrix system. In fact, you should be wary of stocks with high overall Quadrix scores that do not score well for momentum. Such scores sometimes reflect a temporary slowdown, but they can also point to a former blue chip headed for trouble.