STP Algo Trader - The Method

Welcome to the latest issue of STP Algo Trader "The Method"!

Every Saturday, we will break down each of the inputs that go into our proprietary algorithmic trading system - Signal Trader Pro.

Not only do we want to share the inner workings of our system, but we want to educate you on how to become a better investor. Remember, our ultimate goal is to help you MAKE MONEY!

In the last several issues, we have been discussing the operating metrics we look at in our points scoring system.

Remember that a 15-point scoring system powers our platform. The higher the score, the greater the probability that the idea will be a winner. Our historical data shows a significant difference between the highest and lowest-scoring signals.

In those recent issues we outlined the operating metrics that we analyze – revenue, cash flow (EBITDA) and earnings (earnings per share or “EPS”). We also walked through how we look for year-over-year growth in these metrics and a history of beating numbers.

Today, we will discuss the most powerful of our operating metric analysis – metric revisions.

So, what do we mean when we say, “metric revisions”?

We have previously discussed how each of the companies in our underlying universe of stocks we analyze is followed by at least six Wall Street analysts. Many of these stocks are followed by many more than that…

Each of these analysts publishes estimates for how they think the companies will perform on these different financial metrics in upcoming quarters and years.

The average of these analysts create a “consensus” number and last week we discussed how we are looking for companies that consistently do better or “beat” these consensus estimates.

As companies beat (or miss) these numbers, the consensus estimates will go up or down. The charts look the same as a stock chart.

For instance, here are the earnings per share revision for Alphabet, Inc. (NASDAQ: GOOG) …

The green line is the consensus estimate for 2025 EPS.

On the chart you can see that back in 2022, this number was trending lower. At the time, GOOG – like its other digital peers – was dealing with a period where they were digesting the tremendous growth of the post-COVID period.

We have called this period the “COVID hangover.” GOOG and the other major technology companies like Meta Platforms, Inc. (NASDAQ: META) and Amazon.com, Inc. (NASDAQ: AMZN) were all seeing negative earnings revisions.

For GOOG you can see that the estimates for 2025 EPS went from over $9 per share to around $7.25 over the course of a year.

The black line is the stock price, and you can see how closely correlated it was to the EPS revisions. As GOOG estimates fell, so did GOOG stock price.

The stock price also stabilized and began to recover right before the EPS revisions bottomed out.

This is no accident.

In our three-decade history as a professional trader, metric revisions are by far the most powerful correlation to stock prices.

Look again at the chart and you will see that as EPS revisions started to go higher; the stock also started trading higher.

One simple rule for the markets is that if you can find a company that has consistently higher metric revisions – the numbers keep moving higher – then you will find a stock that is going higher.

There might be times where the stock consolidates, but if the numbers move higher then the stock will eventually catch up.

This is why this is the metric that we focus on the most when looking at ideas in our TRADING strategies.

We start by looking at the metric revisions. We only want to buy companies with the numbers going higher. We also want to avoid AT ALL COST companies where the numbers are going lower.

This doesn’t mean that stocks where the numbers are not going higher or going lower aren’t good trades. It just means that over the population of opportunities, they are lower probability trades. We don’t have to do them and, accordingly, avoid them.

In fact, if we could recommend just ONE data set that traders should focus on to identify potentially profitable trades it would be this metric.

There is a challenge for most traders, though, and it is a big one.

This data is not readily available. You can’t find it on Yahoo Finance or through your broker.

There are only a few financial data services that put together all the data to be able to calculate these numbers. These services all cost tens of thousands of dollars per year.

At Signal Trader Pro, we pay over $50,000 per year for our Bloomberg service that provides us with the data.

The good news for our readers is that by accessing Signal Trader Pro, not only do you get access to this data as part of the scoring system, but you also get access to all the other metrics.

Follow the metric revisions and you will know where the stock is going!

Click here for more information and to sign up for Signal Trader Pro.