PowerRatings

I received a number of requests for me to offer a review of PowerRatings. Many of you are familiar with this product due to TradingMarkets website.

PowerRatings is a quantitative rating method which ranks stocks on both safety and the potential for price appreciation. According to the website, stocks with high PowerRatings (8-10) have historically outperformed the stock market over the next 12 months while stocks with low PowerRatings (1-3) have historically tended to underperform the market. From 1995-2007, 81% of stocks with PowerRatings of 10 increased in price one year later. On the other end, more than 65% of stocks with a PowerRating of 1 lost value over the following one year period.

The website recommends building a portfolio of stocks with PowerRatings of 9 and 10. Once the stock's rating declines, they urge replacing the stock with another stock rated 9 or 10. Another recommended strategy is to invest in stocks with PowerRatings of 10 and use a 100% profit target and a 20% protective stop. According to backtesting, the average gain per trade using this approach has been more than 41% per stock with an average holding period of about two years. Here are two nice looking graphs that illustrate the effectiveness of the system:

There's no doubt, these are very impressive performance numbers. So, should you run out and subscribe to their service? In my view, the jury is still out. The only way to evaluate these systems are to engage in some serious testing and tracking over a lengthy period of time which is more time consuming and painstaking than most will endure. Fortunately, I'm an exception to that rule. For the record, I was only able to locate one another independent performance review and it was over a short period of time.

As you may suspect, I always take published stats with a grain of salt as there are just too many ways to cook the data to make your system look better than it performs in reality. In addition, just because the system has performed well in the past offers absolutely no guarantee that it will do so in the future (if only the market were than easy!) In fact, as things tend to go, they often do the very opposite. We've seen that principle validated in other quant/ratings systems many times. For example, the well-known and highly regarded ValueLine in recent years experienced a situation where their worst ranked stocks significantly outperformed their top ranked stocks. Yikes!

With that said, over the weekend I did two things to test the PowerRatings. The first thing simply is to build a tracking portfolio from what their system thinks is the best of the best - the PowerRatings 10's portfolio. There are only 10 stocks in this portfolio and all of them are rated 10. Interesting enough, all of them are fairly defensive/pro-recession like stocks and include the following: BRKA, CL, CRL, CVD, KO, MGG, PAA, PRE, THI, and VMSI. I'll track these 10 and report back.

As you know, the way I really like to test these systems is to use my own stock screens as the foundation. Ideally, this is probably how most investors will use a system like this - i.e. they place their portfolio/watchlists and rank them accordingly. In addition, ideally utilizing a solid group of stocks to work with should enhance the future returns of the system or at least give it the best chance to show off its usefulness. Here is how stocks found within my stock screen machine are currently rated.

Performance is everything and I'll report back after some time has passed. But, without that data, here are what I think are some positives and negatives about their offering overall:

Positives:

• Easy import function to sort and rate stocks as an entire portfolio

• Email Guardian Alerts which easily allow you to keep on top of upgrades & downgrades daily

• PowerRatings charts which allow you to see how your stocks have rated in the past along with a simple pricing chart

• PowerRatings by market that enable to you see which stocks are rated best in the Dow, Nasdaq, & S&P 500

• Useful daily/weekly analysis and stock spotlights by David Penn

• Prominent Portfolios (like Warren Buffett to SAC Capital) are filtered through the system

• PowerRatings of the stocks in ETFs

• PowerRatings for industries allows for some interesting sector-based analysis/screening

Negatives:

• I would like to see more performance data and information about the system including rate of position turnover

• If the website gains in both popularity and use, I suspect past results will not be repeated

• PowerRatings portfolio - you should be able view more than 15 stocks at a time

• PowerRatings portfolio - excel export function should include ratings data

• Screener only allows to search powerratings - would be helpful to include both technical/fundamental scans as well

• Education section needs improvement

• Price is expensive ($49 per month/$449 per year) compared with other services

Conclusion: The website is designed well and more user friendly than some of its competitors. David Penn's commentary/analysis is also major plus. I also found it interesting to see what stocks are currently favored (i.e. recession/defensive names) not to mention how stocks within my own screens were rated. With any quant system like this, I'll ultimately let the performance data speak for itself and be extremely slow to incorporate it into my own approach unless it proves consistently helpful.