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Scoring Models

A scoring model sets criteria for Scrab's algorithms to assess thousands of companies based on rules you define for low or high scores.

Updated over a week ago

Scrab allows you to use financial data and your approach to finding, analyzing, and selecting companies for your portfolio with scoring models.

Uncollapse each section to learn about the following:

Why are scoring models important?

Scoring Models is how you tell Scrab what is essential when researching companies. They are also crucial for company comparisons, tracking scoring changes, and backtesting.

While some Scrab tools don't require a detailed scoring model, having one already configured helps tailor your experience across all functionalities.

Don't worry if you're starting out; we've got ready-made models to get you going, and they can be easily edited to match your criteria as you go.

How do Scoring Models Work?

Scrab's scoring models combine financial metrics data, along with your custom thresholds of what a good or bad stock means to you. Scrab uses metrics categories alongside specific rule types you can create and leverage to create a personalized scoring model.

A scoring model can be as simple as looking for companies with metrics that matter most to you.

For example:

'I want to find companies with high long-term EPS growth prospects, low P/E ratios, or both.'

In both cases, you need to define two things for each metric:

  1. What does the high and low growth mean to you? What is the threshold for growth being high, in your opinion?

  2. How important are both criteria to each other? Is one metric more important than the other to you?

Both definitions can (and should) be number-based, for example:

  1. If High growth for you means > 30 percent EPS growth per year on average, and low P/E means < 15.

  2. If growth is twice as important for you over P/E, and you wanted to use a range of '0-100' points, then you would give it 66.66 points (66.66% of the total score available), and if the P/E is < 15, then give it 33.33 points more (33.33% of the total score available).

After updating your criteria in Rule Settings, if Scrab finds a company that matches your criteria in full (growth > 30 and P/E < 15), then you will see the total company score equal to 100 points (100% of the total score available).

On the other hand, let's suppose one of the parameters is not met.

For example, growth equals 28 percent yearly, but P/E is still lower than 15. Scrab would score this company slightly lower in that case, giving it only 95% of the total score.

Keep in mind that the above is just an example, and all points and total scores are fully customizable at any time. You can use whatever numbers indicate 'Good/Bad' to you.

Additionally, Scrab continuously monitors any metrics and score changes, ensuring your scoring model is immediately updated to reflect any changes. (Read about alerts here.)

Scoring Model Components

Rule Categories

Rule categories are the foundational elements of a scoring model. They help in grouping similar metrics that are essential for evaluating different aspects of a company’s performance.

Here are some key rule categories:

  • Growth: Metrics in this category focus on the company’s ability to increase its revenues, earnings, or market share over time. Important growth metrics include Revenue Growth, Earnings Per Share (EPS) Growth, and Cash Flow Growth. Growth metrics are crucial for investors looking for companies with strong future potential.

  • Valuation: These metrics assess how a company’s stock is priced relative to its financial performance. Common metrics include Price-to-Earnings (P/E) ratio, Price-to-Sales (P/S) ratio, and Enterprise Value to EBITDA (EV/EBITDA). These help in determining if a stock is overvalued or undervalued.

  • Fundamentals: Metrics in this category represent a company's key financial metrics. Key fundamental metrics include CFO to Debt, Times Interest Earned, ROIC, Debt to Assets, Quick Ratio, and Default Probability.

Rules

Rules are the criteria used within each rule category to evaluate a company’s performance. Different types of rules can be applied to analyze various aspects of a company:

  • Static Range: This rule type assesses whether a particular metric falls within a predefined range. For example, if the Debt-to-Equity ratio is less than 0.5, it may be considered good.

  • Historical Range: This rule type compares a metric’s current value to its historical range. It helps in understanding whether a metric is performing better or worse compared to its past performance. For instance, comparing the current P/S ratio to its historical average.

  • Metric Comparison: This rule involves comparing one metric to another to draw conclusions. An example would be comparing the current P/E ratio to the industry average P/E ratio.

  • Change Over Time: This rule evaluates how much a particular metric has changed over a specific period. For example, assessing the percentage increase in Revenue Growth over the past three years.

  • Max Decline: This rule focuses on the maximum decline a metric has experienced over a period, helping to identify potential risks. For instance, measuring the maximum drop in stock price over the last year.

Building a Good Scoring Model

With over 500 indicators available in Scrab, identifying which metrics matter most to you is key.

If you're starting, as a best practice, an effective scoring model should combine a wide range of important factors.

These can include:

  • Stock Valuation: P/S Ratio (Price to Sales), P/E (Price to Earnings, etc

  • Analyst Sentiment: Upside, Price to Target changes, etc.

  • Growth Forecast: Revenue, Net Income, Cash Flow Predictors, etc.

  • Financial Health Indicators: Solvency, Liquidity Ratios, Debt Levels, Operating Margin, RO, etc.

At the end of the day, what a good scoring model is, will be up to you and your own investment approach and style.

Scrab's Pre-configured Models

We've set up some pre-configured scoring models in your account to help you get started quickly with Scrab.

Choose templates focused on: Dividends, Growth at Reasonable Price, Hyper Growth, and Value.

These models offer a solid foundation and are fully customizable, allowing you to adjust them according to your investment strategy or even use them as inspiration to create your own.

This way, you can use Scrab without building everything from scratch.

Advanced Settings

If you'd rather tailor your scoring models even more, Scrab allows you to adjust the additional advanced settings:

  • Required Years Since IPO

  • Tolerance for Low Scores & Missing Data

  • Green (high) & (low) score thresholds

Using Scoring Models

Running and Interpreting Scores

Generate Total Company Scores:

  • Once your model is set up, Scrab will calculate scores for each company based on your defined criteria. These total scores help you compare companies on a standardized scale.

  • Use the compare function within your scoring models company list to compare one or several companies in one view.

Analyze Results:

  • Total Scores: Review the total scores to get a quick overview of how each company ranks according to your model.

  • Detailed Rule Breakdown: Dive into the detailed breakdowns to understand how each metric rule contributed to the total score. This analysis helps identify strengths and weaknesses in different areas.

  • Visualize Data: Leverage Master, Multi, or Technical charts for one or several companies from your scoring model.

Make Investment Decisions:

  • Use the scores to make informed investment decisions. For example, you might prioritize companies with high scores in your preferred categories or look for opportunities to improve your portfolio by replacing lower-scoring companies.

Monitoring and Adjusting

Regular Updates:

  • Keep your scoring model updated with the latest financial data. Scrab’s automated updates ensure that your scores reflect the most current information available.

Adjust Criteria as Needed:

  • Investment strategies and market conditions change over time. Periodically review and adjust your scoring model criteria to ensure they remain relevant and effective.

React to Changes:

  • Monitor the performance of your investments and use the scoring model to quickly identify any significant changes or emerging risks. This proactive approach helps you stay ahead and make timely adjustments to your portfolio.

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