A

Actual Earnings Per Share (EPS): the total operating EPS for the stock over the most recent 12 months.

Alpha: is a measure of risk adjusted performance. (See Jensen’s Alpha)

Alpha Rank: all stocks are ranked on a 1-100 scale according to their (Jensen’s) alpha values, with 100 being the top Jensen’s-alpha percentile (the best).

Average Earnings Per Share (EPS) Surprise (%): a weighted average of the firm’s recent 6 quarterly EPS surprises, where the percentage EPS surprise for each given quarter equals the actual announced EPS divided by the consensus expectations prior to the announcement minus one, and where the most recent quarterly EPS surprise is assigned a weight of 6/21, the second most recent quarter’s EPS surprise a weight of 5/21, and so on. This measure reflects the firm’s business growth momentum over the recent 6 quarters.

Average Return: a stock’s average annual return over the recent five years.

Average Trading Volume : the stock’s average daily trading volume (in number of shares) over the recent one month.

B

Beta: a systematic risk measure of the stock, as determined by the Capital Asset Pricing Model (CAPM). A value of 1.0 for a stock’s beta means that the stock has the same amount of systematic risk as the overall market. A value less than one would mean less volatility. ValuEngine uses a 1 month calculation for beta.

C

CAPM: or Capital Asset Pricing Model describes the relationship between risk and expected return and asserts that investors demand higher returns for higher risks. It also explains how diversification serves to reduce volatility in a portfolio.

Chance of Double: the probability that a given stock will double over a specified future time horizon.

Chance of Trouble (loss): probability that a given stock will lose money over a specified future time horizon

Composite Rank: This measure serves as an overall attractiveness measure for each stock, based on both valuation and momentum. Ideally, an attractive stock should have favorable valuation (i.e., a high Mispricing Rank) and top momentum. The composite rank is calculated by taking the sum of Mispricing Rank and Momentum Rank, and dividing it by 200. With the normalization, this rank is also on a scale of 1 to 100.

Conservative Model Price: a fair-value assessment based on the analyst-consensus estimate for the future 12-month Earnings Per Share (EPS) minus one standard deviation of individual analyst forecasts. Other aspects of the fair-value assessment are identical to those of Model Price calculation.

Buy and Trade: a trading system developed by VE Chief Market Strategist which uses his proprietary technical levels and Good Until Cancelled (GTC) orders to trigger position adjustment. For longs, investors increase positions when share prices decline and hit “value levels.” When share prices increase to “risky levels,” long positions are sold off and profits are booked. The opposite is true for short positions – investors increase the position when share prices increase to risky levels and decrease them when they decline to value levels.

D

Debt/Equity: the total debt outstanding divided by total market value of equity.

Dollar Volume: the average daily trading volume (shares) multiplied by the stock price, over the recent month.

E

Earnings Per Share (EPS) Growth Rank : all stocks in our database are ranked into 100 percentile groups according to their expected EPS growth rate. Stocks with an EPS rank of 100 have the highest expected EPS growth, and so on.

Earnings Per Share (EPS) Surprise Rank: all stocks in our database are ranked into 100 percentile groups according to their Recent EPS Surprise. The higher a firm’s Recent EPS Surprise, the higher its stock’s EPS Surprise Rank (on a 1-100 scale).

Earnings Per Share (EPS) Growth Rate: (forecasted Earnings Per Share (EPS) minus actual EPS) divided by actual EPS, multiplied by 100 (to get the percentage growth rate). ValuEngine uses the past one year (12 months) historical EPS figures and future one year consensus estimates going forward to calculate EPS Growth Rate.

F

Fair Value: is a fair value assessment of a stock based on the ValuEngine Stock Valuation Model. The fair value price indicates what the price of the stock should be today, according to the ValuEngine model. It is based on actual Earnings Per Share (EPS) for the previous 4 quarters, forecasted EPS for the following 4 quarters, and the current 30-Yr Treasury Bond yield. There are 10 firm-specific and interest-rate-related parameters each playing a role in the valuation formula (see The Models for specific parameters).

Forecasted Earnings Per Share (EPS): analyst consensus forecast for the firm’s operating EPS over the immediate future 12 months, adjusted using our proprietary EPS forecasting model.

Forecasting models: click for The VE Forecasting Models.

Forecasting horizon: the period of future time over which stock or portfolio performance is being forecasted.

Forecasting Variables: variables used in forecasting stock and portfolio returns include, but are not limited to: momentum variables based on a stock’s own history, price persistence, growth variables, EPS trend variables, book/market, P/E ratio, debt/equity. Other variables for forecasting include ValuEngine’s proprietary constructs.

G

Gorden Model: a stock valuation model that says the fair value of a stock should equal the ratio between the stock’s dividend per share and the difference between the discount rate and the long-term dividend growth rate. This model assumes that the firm’s dividend will grow at a constant rate forever and that the discount rate stays the same forever. While unrealistic, this model does serve to indicate some useful information. First, as interest rates rise (and hence so does the discount rate), a stock’s value should decline. Second, as the firm’s dividend growth rate increases, so should its stock’s fair value. Finally, it is dividends that investors should ultimately care about, an implication that recent stock market evidence seems to contradict.

H

Horizon: see Forecasting horizon.

I

Intermediate-term momentum continuation: a principle proposing that stocks that have increased in value over the past 6 months to a year tend to continue appreciating in the following 6 months to a year.

J

Jensen’s Alpha: a risk-adjusted excess return over the past 12 months, that is, the stock’s return minus its beta times the contemporaneous return on the S&P 500 index.

L

Long-term price reversals: a principle that maintains that stocks that have increased in value over the past 2 to 4 years tend to lose value in the next 2 to 4 years.

M

Market/Book Ratio: market price divided by book value per share (of equity).

Market/Book Rank : all stocks are ranked on a 1-100 scale according to their market/book ratios (of equity), with 100 being the lowest market/book ratio.

Momentum investors: follow an investment strategy that invests mostly in stocks with the best performance over the previous six to twelve months.

Momentum Rank: as defined before, it is the relative return performance of the stock over the recent 12 months. On a scale of 1 to 100, the higher the momentum rank, the stronger the stock has performed in the recent 12 months.

O

Odds Assessments: percentage estimates of the probability that the return on a stock or portfolio will meet or exceed a certain target. The higher the assessed percentage, the more likely the given condition or event will occur.

Optimistic Fair Value: a fair-value assessment based on the analyst-consensus estimate for the 12-month-forward Earnings Per Share plus one standard deviation of individual analyst forecasts. Other aspects of the fair-value assessment are identical to those of Fair Value calculation.

P

P/E (Price / Earnings) Ratio : the stock’s market price divided by actual EPS. The reciprocal of it is E/P ratio.

P/E (Price / Earnings) Ratio Rank : all stocks in our database are sorted into 100 percentile groups according to their P/E ratio. Stocks in the top P/E percentile are each assigned a rank of 1 (the highest P/E stocks), ?K., those in the bottom P/E percentile are each assigned a rank of 100 (the low P/E stocks, or, the traditional value stocks).

Pivot: a pivot can be either a resistance or a support which has been violated for a given time horizon. Once violated, it may act as a magnet during the time frame specified. This is a level at which to consider more aggressive position adjustments.

PortfolioForecast: will tell you the expected future value/return, chance of a double, chance of loss, and the chance of meeting or exceeding any investment target you may have in mind. With this information, you can then see whether you need to change or re-shuffle your portfolio to improve its future prospects.

Portfolio Optimization: Optimization is a pure mathematical problem to maximize or minimize a real function by choosing input values from within an allowed set. There are many ways to do optimization. ValuEngine’s (VE) approach is commonly called “generate and test”. After randomly choosing the component weights for a portfolio, VE calculates the portfolio return and variance. VE may “generate and test” 50,000 times and then the best portfolio option is chosen.

Portfolio optimization requires two main inputs: expected returns and covariance. A covariance matrix is a square matrix that contains covariances between portfolio components. The stock covariances are calculated from the historical prices. It is a pure mathematical process, any one using the same stock historical prices will get the same covariance.

What makes VE different is another input: expected returns. One of the most difficult things to do accurately in finance is to calculate the future expected returns for stocks. The most common method may simply use the past returns for stocks. VE has a proprietary Forecast model, and this is what we use as the input for portfolio optimization. This cannot be replicated by any other firm or researcher as the VE Forecast model is a proprietary model developed and run by the VE research team with great success, since 1999.

Price Level: the market price for any given stock.

Price/Cash Flow: the market price divided by cash-flow per share.

Price/Sales: market price divided by sales per share.

Price/Sales Rank: all stocks on our database are ranked on a 1-100 scale according to their price/sales ratios, with 100 being the lowest price/sales ratio.

R

Rankings: are relative to the entire stock universe & on a 1~100 scale; the higher ranked, the better

Recent EPS Surprise %: a weighted average of the stock’s recent 6 quarterly EPS announcements, where the more recent a quarterly EPS announcement, the more weight it has on this average EPS surprise measure. For each announced EPS, the percentage EPS surprise is determined by the actual EPS minus the pre-announcement analyst consensus estimate, divided by the latter estimate. This measure reflects the firm’s business growth momentum over the recent 6 quarters.

Return Forecasts: best-efforts predictions of a stock’s or portfolio’s future performance, where “best-efforts” means using the current and available information and the “currently known models” to make a performance prediction. Past performance is never a guarantee of future return so there is no guarantee that the forecasts will precisely match what occurs in the future or what becomes known after the fact. These forecasts summarize all the predictive information contained in Mispricing, momentum, size, market ratios, and so on. See also Forecasting Models.

Risky Level: a risky level is a price at which investors should reduce long holdings on share price strength. Some analysts call this a “resistance.” The opposite is true for a short position.

S

Sharpe Ratio: measures the risk-return tradeoff offered by the stock, and it is named after the Nobel Prize winner William Sharpe. It is the stock’s average annual return (over the recent 5 years) divided by its annualized volatility over the same 5 years. High quality stocks are usually associated with high Sharpe ratios.

Sharpe Ratio Rank: all stocks in our database are ranked on a 1-100 scale according to their Sharpe Ratios, with a rank of 100 representing the top 1% Sharpe-Ratio stocks.

Short-term price reversals: stocks that have done well in recent weeks tend to do poorly in the few weeks to come.

Size: refers to market capitalization and is important as it relates to liquidity, or how easy one can buy or sell a stock.

Size-based investors: select stocks based on market capitalization, such as large-cap funds, mid-cap funds and small-cap funds.

Size Rank: as defined before on a 1-100 scale, the higher the size rank, the larger the firm’s market capitalization.

SmartRatings: different ratings of a given stock, each from the perspective of an investor type. A stock that is attractive to an aggressive investor may not be attractive to a value investor. It is based on a proprietary model developed by ValuEngine Inc.

T

Target price: the last trade price compounded by the corresponding return forecast. For example, suppose IBM’s market price is $100 and its forecasted 1-year return is 20%. Then, its forecasted 1-year target price is $120. See Return Forecasts and Forecasting Models.

Traditional Valuation Models: Commonly used and known valuation models that include the Gordon model, variants of the multi-stage dividend-discount model, discounted cash-flow models, and book-value-based residual-income models.

V

Valuation (%): reflects whether a stock is over or undervalued. The more undervalued the valuation percentage, the more undervalued the stock, while the more positive the mispricing percentage the more overvalued the stock. It is recommended that you impose a valuation lower boundary at -75%. Tests show that when the mispricing measure is below -75% the ValuEngine model price may not be reliable.

Valuation Rank: all stocks in our database (about 7000 for the U.S. and 500 for Taiwan) are sorted into 100 percentile groups according to their mispricing level. Stocks in the bottom 1% mispricing group are each assigned a rank of 100 (the most undervalued), those in the second bottom group a rank of 99 (the second most undervalued), and the top percentile a rank of 1 (the most overvalued stocks). Thus, the higher the mispricing rank, the more undervalued the stock.

Value Investors: follow an investment strategy of selecting stocks based on their book/market and price/earnings ratios.

Value Level: a value level is a price at which investors should add to long positions on share price weakness. Some analysts call this a “support.” The opposite is true for a short position.

Volatility: is a reflection of a stocks movement and should be neither good nor bad, but day traders like a lot of volatility and Conservative investors generally like limited volatility.

Volatility %: standard deviation of the stock’s monthly returns during the recent three years, converted to annualized terms. This measure indicates the month-to-month stock price volatility for the firm.

Volatility Rank: all stocks in our database are ranked on a 1-100 scale according to their volatility, with 1 being the most volatile percentile of stocks.