This Rating Could Help You Pick Your Next Stock

How do you make investing decisions? Do you rely on fundamental indicators like price/earnings ratio, free cash flow, and earnings? Are you more technically inclined, relying on relative strength, price levels, and moving averages?

Maybe you’re both, and you’ve found it better to combine both fundamental and technical analysis into your stock research.

That’s exactly what Marc Chaikin thought. So the 40-year Wall Street veteran created the Chaikin Power Gauge stock rating as a way to make buy, sell, and hold decisions easy for everyday investors using the same metrics used by Wall Street professionals.

What Is It?

The Chaikin Power Gauge, the centerpiece of the Chaikin Analytics platform, is a 20-factor model, 85 percent of which is fundamental and 15 percent technical. Created in 2011, the gauge aims to forecast where a stock is headed over the next 3-6 months, and assigns a subsequent rating: green for bullish, red for bearish.

How It Works

The 20 factors in the Power Gauge are grouped into four components—financial metrics, earnings performance, price and volume, and expert opinions—with different weightings assigned to each.

Financial metrics, such as debt/equity ratio, make up the largest part of the Power Gauge. The single most important factor in the Chaikin Power Gauge is Free Cash Flow, or an analysis of how much cash a company actually generates.

Each of the 20 factors is scaled relative to either the stock's industry, or the overall market. These factors are weighted and combined into an overall Rating - either Very Bearish, Bearish, Neutral, Bullish, or Very Bullish - indicating the stock's likelihood of outperforming the market over the next 1-6 months.

What Does It Look Like?

A green rating indicates a bullish outlook on a stock to outperform the market over the next 3-6 months, while red indicates a bearish outlook to underperform. The pictures below show Bank of America Corp BAC’s Chaikin Power Gauge rating on February 28, 2017. You can see the Very Bullish rating, and how each of the gauge’s four categories are also broken down into their own ratings.

Who Should Use It?

A 2011 White Paper by Marc Gerstein analyzed the Chaikin Power Gauge, and found it can be used for a variety of investment styles.

What’s unique about the Chaikin Power Gauge is it’s broad makeup. It factors in the same things that Warren Buffett uses to make his decisions, such as ratios and Free Cash Flow, while also considering a company’s technical makeup compared to the S&P 500, short interest, and insider activity.

“We rely on the Power Gauge Rating to do the fundamental heavy lifting, to identify stocks that are likely to outperform the market or underperform the market,” Chaikin said of the rating. “We really believe in keeping it simple and that it will benefit any investor, novice to experienced.”