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!

Over the last few issues, we have analyzed the fundamental factors that power our "15" point system.

The quick and straightforward recap is that we are looking at three metrics – revenue, cash flow (EBITDA), and earnings (EPS). Then, we look at three analyses around those metrics – year-over-year growth, how often they beat analysts' expectations for these metrics, and if they are seeing positive revisions in them.

We look back over the last 12 quarters (three years), and if a company shows positive results for at least 75% (9) of those data points, then we ascribe it to a point for that metric and analysis.

In the last issue, we began discussing the most powerful of these metrics – "metric revisions."

This is the trend that we see in the consensus analyst estimates for one of these metrics.

Remember that in our universe of stocks we follow for the system, we only look at companies with at least six analysts covering the stock. This gives us a robust enough set of data to draw some actionable insight.

What we have seen through time is that – in the short-term – stock prices very closely adhere to the direction of revisions.

It is not so much how profitable a company is at the time nor the valuation, but simply that the numbers are moving higher.

One of our favorite examples of this phenomenon is in a well-known and widely owned stock – Meta Platforms, Inc. (META). Here is a chart of the stock price (white line) and the consensus analyst’s estimate for 2024 EPS…

This chart is the perfect example of the impact of revisions on the stock price.

In late 2021, META was expected to earn almost $22 per share for 2024. Over the next 18 months, though, that number fell to less than $10 per share.

This was a result of the “COVID hangover” downturn that impacted all of the major technology companies as well as elevated investments by the company.

At the end of 2022, however, the company saw a stabilization in its business and got a better handle on its costs. They also decided to dial back some of their investments.

The result was that earnings revisions skyrocketed higher, and the stock did the same.

The correlation between the stock price and the EPS revisions is clear on this chart. Notably, the stock price appears to lead the revisions by a few months.

This is not always the case, meaning a lower stock price predicting negative revisions. Once you have negative revisions, however, you almost always have a stock price that is going lower.

One simple rule for owning stocks is to ONLY own stocks seeing positive revisions.

This doesn't mean stocks with negative revisions can't go up, but those are the exceptions, not the rule. Stocks that have positive revisions almost always go up.

At Signal Trader Pro, we seek companies getting the trifecta of revisions. We want to see it across all three metrics.

This shows us that the growth and operating momentum at the company is robust.

Companies that see higher numbers for revenue, cash flow, and earnings are clearly in a sweet spot regarding execution and industrial positioning.

In fact, if we could pick only ONE group of operating metrics to look at in our system – it would be the metric revisions.

A simple system that combined the technical indicators (upward price and RSI "buy" signal) along with the EBITDA and EPS positive revisions would likely capture the majority of the value of our system.

Looking at all of the metrics that make up our "15" point system, though, gives us the most powerful tool, and we see this in the performance of our highest-scoring signals.