Wall Street veteran Marc Chaikin has long been associated with technical analysis. Several of the indicators he created, such as the Chaikin Oscillator and Chaikin Accumulation/Distribution (Money Flow), are standards in the field. More recently, Chaikin, using Portfolio123, developed his Power Gauge ranking system, which is a holistic multi-factor approach that considers the full range of combined factors discussed above, to study the top factors that he believes drive stock performance. (Disclosure: In my capacity at Portfolio123, I conferred frequently with Chaikin as he developed the model and since August 2018, I have been formally associated with Chaikin Analytics in addition to my ongoing work with Portfolio123.)
Chaikin does not organize and present the Power Gauge in terms of Value, Quality and Growth, as I typically do in my Portfolio123 systems. But all of the elements are present and consistent with core strategy design principles. The specific Power Gauge formulations and weights are proprietary but the general formulation is presented on chaikinanalytics.com as follows:
Value (Financial Factors)
- Long-term debt to Equity
- Total long-term debt divided by total common equity, for the latest quarter.
- Price to Book
- The ratio of a stock’s current price divided by its book value per share, as of the latest quarter.
- Return on Equity
- Income available to common stockholders as a percentage of total common equity for the past 12 months.
- Price to Sales
- The ratio of a stock’s Market Cap plus long-term debt divided by sales, over the past 12 months.
- Free Cash Flow
- A stock’s net free cash flow relative to its Market Cap for the latest quarter.
Growth (Earnings Factors)
- Earnings Growth
- The weighted average of the last 3 to 5 years growth in EPS.
- Earning Surprise
- The weighted average of recent quarterly EPS surprises.
- Earnings Trend
- The EPS percentage change over the trailing 12 months.
- Projected Price/Earnings Ratio
- The ratio of a stock’s current price divided by its earnings per share, as of the latest quarter.
- Earnings Consistency
- The consistency of EPS over recent and projected fiscal years.
Technical (Technical Factors)
- Relative Strength vs Market
- A stock’s six-month price performance versus the S&P500.
- Chaikin Money Flow
- CMF Is a proprietary technical indicator that calculates the buying pressure or selling pressure for a stock.
- Price Strength
- The ratio of a stock’s closing price to its 200-day exponential average (DEMA).
- Price Trend ROC
- The 42-day change in divergence from the stocks 200-day exponential average (DEMA).
- Volume Trend
- The ratio of a stock’s 30-day versus its 90-day average volume.
Sentiment (Expert Factors)
- Analyst Estimate Trend
- 13-week change, mean analyst EPS estimate for the next fiscal year.
- Short Interest
- Percentage of a stock’s outstanding shares that investors have sold short but not yet covered or closed out.
- Insider Activity
- The net shares of a stock purchased by company insiders over the past six months.
- Analyst Ratings
- The four-week change in a stock’s average analyst rating.
- Industry Relative Strength
- The six-month performance of a stock’s industry versus the market.
Obviously, Value is important in this model, but its application is far from naive. No matter how well a stock rates in terms of low value ratios, it cannot be ranked highly unless Quality is sound and unless Growth prospects are favorable. Growth is represented through the basic historic data as well as through the Sentiment and Momentum proxies (with Technical analysis, reliant as it is on price and volume data, being in the Momentum family under the schema I use). The selection of these 20 factors, and their weights, came about through very human consideration of the way they interact to select promising stocks. This is consistent with what Chaikin frequently refers to as “the smell test” and with one of the most important but least-quoted lines from James O’Shaughnessy’s What Works on Wall Street: “If there is no sound theoretical, economic, or intuitive, common sense reason for the relationship, it’s most likely a chance occurrence.”