How the Compass Score Works
A simple score backed by decades of academic research. Here's exactly what goes into it.
The Six Factors We Measure
The Compass Score combines six key metrics that academic research has shown to predict stock performance. Each factor is standardized and weighted based on its predictive power.
Return on Assets (ROA)
How efficiently does the company turn its assets into profit? Higher is better.
Gross Profitability
Revenue minus cost of goods, relative to assets. Measures core business strength.
Operating Cash Flow
Cash generated from operations relative to assets. Real cash, not accounting profits.
Free Cash Flow
Cash available after capital expenditures. What's left for shareholders.
Volatility
60-day price volatility. Lower volatility stocks tend to outperform. (Inverted: lower is better)
Asset Growth
Year-over-year asset growth. Slower, steady growth beats aggressive expansion. (Inverted)
Why These Specific Factors?
These aren't arbitrary choices. Each factor is grounded in academic finance research:
- Profitability (ROA, Gross Profit): Companies that generate more profit per dollar of assets consistently outperform. This is the "Quality" factor documented by Asness, Frazzini & Pedersen (2019).
- Cash Flow: Earnings can be manipulated. Cash is real. Companies with strong cash generation are less likely to disappoint investors.
- Low Volatility: The "low-vol anomaly" - less risky stocks have historically delivered better risk-adjusted returns than theory predicts.
- Conservative Investment: Companies that grow assets slowly and steadily tend to outperform those that expand aggressively. This is the "Investment" factor from Fama & French (2015).
What We Deliberately Exclude
❌ Momentum
Recent price performance. While momentum works short-term, it adds volatility and reversal risk. Once you account for quality, momentum becomes redundant.
❌ Price Targets
Analyst predictions are notoriously unreliable. We focus on actual company fundamentals, not what someone thinks the stock "should" be worth.
❌ Social Sentiment
Reddit hype and Twitter buzz are noise. The Compass Score measures company quality, not how many people are talking about it.
❌ Sector Biases
We don't favor tech over utilities or vice versa. Quality companies exist in every sector, and we measure them on a level playing field.
How the Score is Calculated
- 1
Gather Latest Financials
We pull the most recent quarterly data for each company from SEC filings.
- 2
Standardize Each Factor
Each metric is converted to a z-score using historical averages from our research period (1995-2019).
- 3
Weight and Combine
The weighted z-scores are combined into a single raw score.
- 4
Convert to Percentile
The raw score is ranked against all 4,500+ stocks to produce a 0-100 percentile score.
Is the Stock Undervalued?
The Valuation Score uses technical analysis to identify if stocks are trading below fair value. Best used together with Compass Score for a complete picture.
Looking for Growth Stocks?
The Moonshot Score identifies high-quality growth companies with significant long-term potential. A selective quality-first approach that only ~10% of stocks qualify for.