How to reduce risks and increase returns: Factor Scores in action

In the world of investing, analyzing the vast flow of data can be quite challenging. This is where Factor Scores step in as an indispensable tool that streamlines the stock selection process by focusing on three core indicators: Value, Growth, and Momentum. Below, we'll examine what these factors mean, how they're rated, and how to apply them in various investment strategies.

What Are Factor Scores?

Factor Scores is a system that evaluates stocks based on three key parameters:

1. Value: Shows whether a stock is undervalued or overvalued relative to its fair price.
2. Growth: Reflects the company’s prospects in the near future, such as revenue and profit growth.
3. Momentum: Demonstrates the current market trend, indicating whether a stock is in an upward or downward price movement.

Each of these factors receives a grade from A to F. The closer the score is to A, the more favorably the stock meets the positive criteria for that factor.

Decoding the Grades

A — Top Tier

• Value: The stock is significantly undervalued, providing ample growth potential.
• Growth: The company shows robust progress in revenue, profit, and market share.
• Momentum: A stable upward trend and high investor interest.
• Example: Stocks rated A are often suited for long-term growth strategies and capital appreciation.

B — Reliable Choice

• Value: Moderately undervalued, offering reasonable growth prospects.
• Growth: Good, though not always perfectly consistent, growth indicators.
• Momentum: A positive trend, but perhaps not as strong as stocks rated A.
• Example: Stocks rated B are typically used for portfolio diversification and risk reduction.

B — Reliable Choice

• Value: Moderately undervalued, offering reasonable growth prospects.
• Growth: Good, though not always perfectly consistent, growth indicators.
• Momentum: A positive trend, but perhaps not as strong as stocks rated A.
• Example: Stocks rated B are typically used for portfolio diversification and risk reduction.

C — Average Level

• Value: Priced close to the fair market value, limiting rapid upward potential.
• Growth: Moderate growth indicators without significant acceleration.
• Momentum: A neutral trend, with fluctuations lacking a clear direction.
• Example: Stocks with a C rating are often considered for stable, long-term holdings.

D — Risky Choice

• Value: The stock is overvalued, increasing the likelihood of a price drop.
• Growth: Weak growth indicators or signs of slowing down.
• Momentum: A downward trend or unstable price movements.
• Example: A D rating signals caution and the need for additional research before investing.

F — Lowest Rating

• Value: Significantly overvalued, posing a considerable risk for investors.
• Growth: Low or negative growth indicators.
• Momentum: A persistent downward trend and lack of market interest.
• Example: Stocks with an F rating are typically not suitable for long-term investments but may be interesting for short selling.

How Factor Scores Help You Build a Strategy

• Growth-Oriented Strategy

If your goal is to maximize returns, focus on stocks with high Growth and Momentum scores (for example, A or B). Such stocks often have the best chance of rising in the near future.

• Balanced Strategy

If your goal is to maximize returns, focus on stocks with high Growth and Momentum scores (for example, A or B). Such stocks often have the best chance of rising in the near future.

• Conservative Strategy

If stability is your priority, look for stocks with strong Value ratings and medium Growth. This approach offers reliability and helps avoid significant drawdowns.

• Short-Term Trading

For trading over short timeframes, pay attention to stocks rated A or B in Momentum. This lets you leverage current market trends.

• Risk Identification

Stocks rated D or F require extra caution or are best avoided. Buying them is only justified if you have a clear strategy (such as short selling).

Practical Application of Factor Scores: Analyzing Three Top Stocks

To illustrate how Factor Scores can be used in practice, let’s examine three stocks from today’s “TOP” list and see how these evaluations help in choosing the right approach.

1. QFIN (Qifu Technology Inc)

• Value: A
• Growth: B
• Momentum: B
• Sector Ranking:: Business Services – Top 73

Analysis

A high Value rating (A) indicates the stock is undervalued. A B rating for Growth highlights the company’s positive outlook, while B for Momentum confirms a stable upward trend.

Recommendation

A good choice for a growth or balanced strategy. High Value (A) reduces risk, and strong Growth (B) provides potential for profit.

2. KINS (Kingstone Companies Inc)

• Value: B
• Growth: B
• Momentum: A
• Sector Ranking:: Finance – Top 26

Analysis

B ratings in Value and Growth suggest a moderate appeal in terms of pricing and potential growth. A high Momentum score (A) indicates strong interest from the market.

Recommendation

Ideal for active traders and those looking for short-term gains. High Momentum suggests an opportunity to benefit from the current trend.

3. ATAT (Atour Lifestyle Holdings Ltd)

• Value: C
• Growth: A
• Momentum: B
• Sector Ranking:: Consumer Discretionary – Top 20

Analysis

The standout factor here is Growth (A), indicating strong expansion potential. Momentum (B) shows a continuing upward trend, while Value (C) indicates the stock may be priced at or slightly above its fair value.

Recommendation

An attractive choice for an aggressive growth strategy, given the high Growth rating, although this comes with somewhat higher risk.

How to Use This Information

• QFIN: Add to your portfolio for stable growth and risk mitigation.
• KINS: Use for active trading to capitalize on the current trend.
• ATAT: Consider for a growth-focused strategy aimed at higher returns in the coming months.

Conclusion

Factor Scores are a powerful tool that makes it easier to single out underperforming stocks and identify the most promising ones. By analyzing each indicator—Value, Growth, and Momentum—you can create an optimal strategy, whether your goal is growth, reliability, or diversification.

Try PredictStock today and see how Factor Scores can boost the efficiency of your investment portfolio!

Disclaimer: The materials are provided for informational purposes only and do not constitute investment advice. Before making financial decisions, consult a professional financial advisor.