Our Methodology
Complete transparency in how we rate stocks. Our quantitative approach is built on proven academic research and fully automated analysis.
Quantitative Approach
EdgeQuant uses a fully automated, factor-based quantitative model to rate stocks. Our approach is inspired by decades of academic research in asset pricing and behavioral finance, particularly the work of Eugene Fama, Kenneth French, and momentum research by Jegadeesh and Titman.
Unlike subjective analyst ratings, our system evaluates every stock using the same consistent criteria, eliminating human bias and providing objective, data-driven analysis you can trust.
The Six Factors
Our rating system evaluates stocks across six fundamental dimensions. Each factor is scored independently, then combined into an overall rating.
Value Factor
Measures whether a stock is trading at an attractive price relative to its fundamentals. Value stocks have historically outperformed growth stocks over long periods.
Key Metrics:
- Price-to-Earnings (P/E) Ratio
- Price-to-Book (P/B) Ratio
- Price-to-Sales (P/S) Ratio
- Enterprise Value to EBITDA
Growth Factor
Evaluates the company's historical and projected growth trajectory. Companies with strong, consistent growth often justify premium valuations.
Key Metrics:
- Revenue Growth (1-year and 3-year)
- Earnings Growth (1-year and 3-year)
- EPS Growth Rate
- Year-over-Year Growth Trends
Profitability Factor
Measures how efficiently a company converts revenue into profit. Highly profitable companies typically have strong competitive advantages.
Key Metrics:
- Return on Equity (ROE)
- Return on Assets (ROA)
- Operating Margin
- Net Profit Margin
- Gross Margin
Quality Factor
Assesses balance sheet strength and financial stability. Quality companies have low debt, strong cash generation, and resilient business models.
Key Metrics:
- Debt-to-Equity Ratio
- Current Ratio (Liquidity)
- Interest Coverage
- Free Cash Flow
- Asset Turnover
Momentum Factor
Captures price trends and market sentiment. Research shows that stocks with strong recent performance tend to continue outperforming in the near term.
Key Metrics:
- 6-Month Price Return
- 12-Month Price Return
- Relative Strength vs. Market
- Price Trend Analysis
Size Factor
Considers the company's market capitalization. The size premium (small-cap outperformance) is well-documented in financial research.
Key Metrics:
- Market Capitalization
- Relative Size vs. Market
- Small-Cap Premium Adjustment
Factor Weights & Rationale
Each factor contributes equally to the overall rating, ensuring a balanced assessment across all dimensions. This equal-weight approach prevents any single factor from dominating the rating.
Rating Scale Explanation
5 Stars ★★★★★
Strong BuyExceptional stocks scoring 4.0+ overall. These companies excel across most or all factors and represent the highest-quality investment opportunities.
4 Stars ★★★★☆
BuyHigh-quality stocks scoring 3.0-3.99. These companies show strength in multiple factors and are attractive investment candidates.
3 Stars ★★★☆☆
HoldNeutral stocks scoring 2.0-2.99. These companies have mixed signals across factors. Suitable for defensive positions or further research.
2 Stars ★★☆☆☆
SellBelow-average stocks scoring 1.0-1.99. These companies show weakness in multiple factors and may face challenges.
1 Star ★☆☆☆☆
Strong SellPoor-quality stocks scoring below 1.0. These companies exhibit significant weaknesses across most factors and should be avoided.
Data Sources
We source our fundamental and pricing data from trusted, institutional-grade providers:
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Massive.com - Primary source for fundamental data, financial statements, and company metrics
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Financial Modeling Prep (FMP) - Supplementary source for additional fundamental data points
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Daily Updates - All ratings are recalculated daily with the latest available data
Academic Research Foundation
Our methodology is grounded in decades of peer-reviewed academic research in finance and economics. Key foundational studies include:
Fama & French (1992, 1993, 2015)
"The Cross-Section of Expected Stock Returns" and subsequent work on the three-factor and five-factor models, establishing the value and size premiums.
Jegadeesh & Titman (1993)
"Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency" - foundational momentum research.
Novy-Marx (2013)
"The Other Side of Value: The Gross Profitability Premium" - establishing profitability as a key factor.
Piotroski (2000)
"Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers" - quality and fundamental analysis.
Important Disclaimer
EdgeQuant ratings are for informational and educational purposes only. They do not constitute financial advice, investment recommendations, or an offer to buy or sell securities. Past performance does not guarantee future results. All investments carry risk, including the potential loss of principal. Please conduct your own research and consult with a qualified financial advisor before making investment decisions.
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