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Comparing Stock Sorting Methodologies

This report examines various stock sorting methodologies, focusing on independent, layered, and bi-variate strategies. We analyze the impact of sorting methods on stock rankings, considering factors like equal weighting versus value weighting and the importance of sequence in screening results. Utilizing data from large-cap stocks listed on NYSE or NASDAQ, we assess the effects of fundamental, technical, and debt structure variables on performance. Future research directions emphasize longer time horizons and the use of deciles for better migration tracking and comparative analytics.

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Comparing Stock Sorting Methodologies

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  1. Comparing Stock Sorting Methodologies Strategic Partners 27 Feb 04

  2. Current Sorting Methodologies • Independent • Sparse buckets • Layered • Equal # of stocks/bucket • Bi-variate • Simultaneous Sorting

  3. Independent Sort Sequential Sort 5 5 5 FACTOR 2 FACTOR 1 FACTOR 1 4 4 4 5 4 3 3 3 3 2 2 2 2 1 1 1 1 Score i = (wt1)*(Factor1_Rankingi) + (wt2)*(Factor2_Rankingi) Score i = (wt1)*(Factor1_Rankingi) + (wt2)*{Factor2_Rankingi | Factor1_Rankingi} FACTOR 2

  4. 3 2 1 Independent Sort Sequential Sort 3 3 3 3 2 2 2 2 1 1 1 1 1 2 3 Correlation (Factor1_Ranking, Factor2_Ranking) = 0 Factor 1 Factor 1 Factor 2 Factor 2

  5. 3 2 1 Independent Sort Sequential Sort 3 2 1 1 2 3 Correlation (Factor1_Ranking, Factor2_Ranking) = 1 Factor 1 Factor 2

  6. 3 2 1 Independent Sort Sequential Sort 3 3 2 2 1 1 1 1 2 2 3 3 Correlation (Factor1_Ranking, Factor2_Ranking) = -1 Factor 1 Factor 1 Factor 2 Factor 2

  7. Data • Universe • Large Cap (>500 Million) • Listed on NYSE or NASDAQ • Variables • Fundamental • Technical • Debt Structure • Correlation Impact

  8. Comparing Methodologies • Different Factors • Weighting • Equal Weight vs. Value Weight • Time Horizon • Value vs. Growth Market

  9. Factor Selection

  10. 5 5 FACTOR 2 FACTOR 1 4 4 5 5 4 4 3 3 3 3 2 2 2 2 1 1 1 1 Importance of Sequence FACTOR 2 FACTOR 1

  11. Impact of Sort Order

  12. Screening Results PE/Leverage Layered Sort

  13. Screening Results Leverage/PE Layered Sort

  14. Future Research • Use longer time horizon to incorporate different markets • Compare Bi-variate to Layered and Independent Screening • Use Deciles rather than Quintiles • Migration tracking

  15. 8 8 8 8 8 8 7 7 7 7 7 7 6 6 6 6 6 6 5 5 5 5 5 5 4 4 4 4 4 4 3 3 3 3 3 3 2 2 2 2 2 2 1 1 1 1 1 1 Stock Sorting with Migration Tracking adjusted Score = Score + Migration adjustment T-5 T-4 T-3 T-2 T-1 T

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