Historically, it has been profitable to invest in stocks with a high HeyScore.
HeyScore distills several methods to a single number that can be perceived as the technical health of the stock. The score is based on several time-scales, where the longest and most significant is a year. This means that during the last year, stocks with a high HeyScore have typically had considerable growth.
HeyScore is measured relative to other stocks. This means that the score for a given stock will change, depending on the group of stocks used for comparison. Thus, in theory a stock can have a high score even though it has a negative price trend. In practice though, a stock with a high score will have had stable growth for the past year.
Figure 1 shows typical price series for stocks with low, medium and high HeyScore
If a stock in your portfolio has a HeyScore of 100 it has probably increased by more than 40% during the past year. This primarily means that you can be happy, if you held it for that long. It does not automatically tell you whether to keep it in your portfolio.
To answer that question, it is necessary to add more information to the selection process. You need to consider a group of stocks, that you can select among. The criteria you use to select stocks will, together with the HeyScore, enable you to decide whether you should keep or sell your stocks.
The number of stocks in the group is important. HeyScore is a relative number, so it is harder to get a high score in a large group. Combined with the fact that we prefer liquid stocks, so that we can buy or sell when necessary, we obtain a set of four rules for how we use the HeyScore:
– Use HeyScore to identify candidates for new long positions
– Choose from large groups of stocks (100+)
– Choose large cap companies
– Choose liquid stocks
To illustrate how HeyScore can be used to pick stocks using the four rules, we yet again look at S&P 500, since it clearly complies with the requirements. All companies in S&P 500 are large cap, the stocks are all liquid, and there are many stocks. Figure 2 shows the reward for stocks from S&P 500 with a high HeyScore between 2007-2017.
The figure shows that an investment in any one of these stocks can be expected to beat the market, but also that there is significant uncertainty about the return. There is a realistic chance of performing worse than the market, or even loosing money. However, over time and with a few more stocks you can expect to significantly beat the market.
With the HeyStocks screener you can easily implement the 4 rules and start using HeyScore to find your next investment.