Over the last month, we incorporated a new and improved rating system for our initial screen in Lattco. RapidRatings creates an unbiased, quantitative financial health rating that provides an objective score for nearly all public companies. Like our previous scoring system, Zeta and its predecessor the Z-score, RapidRatings takes published data from a company’s financial statements in order to calculate a score to evaluate default probability. The comprehensive nature of the score, along with the more regular updates should translate into improved results now and in the future for Snider Investment Method investors.
RapidRatings uses only financial statements to provide an objective view of financial health. Consistent with our investment philosophy, the score does not include market signals, guidance from management or the feelings of an analyst. Assigning each company a score between 0-100, the model compares over 70 factors in 24 industries to rate the company against its peers. RapidRatings is well-known within the institutional wealth management and credit analysis industries. Large companies around the globe trust RapidRatings to provide a credit analysis and health scores for their suppliers and investments. All levels of Lattco can enjoy this enhancement at no additional cost.
RapidRatings will be our primary bankruptcy screener replacing Zeta moving forward. Since our inception in 2002, the Snider Method has experienced a very small percentage of bankruptcies considering the 50,000+ closed positions. However, it remains the largest risk of the strategy. Some of those losing positions were a result of fraudulent financial statements. With significantly more ratios included in RapidRating’s health score, the potential to identify inconsistencies greatly increases. Also, as the name implies, RapidRatings creates a new score after each quarterly earnings release. Previous scores and rating systems only used annual reports potentially incorporating important information too late.
Dr. Patrick Caragat designed the initial framework in 1991. Today he serves as the Head of Research and Development for the firm. He analyzed millions of company years’ worth of data to assess the financial health and performance of companies. Today the score includes 62 different ratios to measure operating profitability, net profitability, cost structure efficiency, and capital structure. Companies that pass the screen for Snider Method purposes will have an expected probability of default of less than .25%.
Significant care and research are required every time we introduce a change to the Method. Stock screening is easily one of the most important components of the Snider Investment Method. However, all the pieces of the strategy that come after are key in managing risk and dealing with securities that decline in price. I’m excited about the addition of RapidRatings. It will take what I believe to be an already great investment strategy and make it even better.