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One question we’ve been asked many times is whether our stock ratings can be used for portfolio management or merely for trading stocks.   Since all the key day available are arrayed into a comprehensive data series with 20+ years of history, the answer is a resounding yes.The most proprietary elements in our data are our models’ forecasts of returns for upcoming periods. These forecasts help drive the ValuEngine Buy/Sell/Hold Ratings.The numerical ratings are: 1= Strong Sell; 2 = Sell; 3 = Hold; 4 = Buy; and 5 = Strong Buy.The other proprietary data element is the valuation; it is a percentage which is from our valuation model.It can be thought of as an estimate of how much more or less the current stock price is than its fair intrinsic value.A positive percentage indicates overvaluation while a negative number reflects undervaluation.All other data elements included in our data feeds and printed reports are derived from the price-return forecasts and the valuation model.The important factor in using the ratings and valuations in portfolio management is that the data can be used for screening. 

The vast majority of asset management companies today use model portfolios. Model portfolios, which surged to a record $7.7 trillion in assets in early 2025, offer a way for advisors to outsource portfolio construction and rebalancing. The proliferation of model portfolio construction for different client profiles is a growing trend driven by efficiency, scalability, and improved client outcomes. Financial advisors are increasingly using these pre-built investment strategies, which can be tailored to meet individual client needs. Construction starts with a systematic and data-driven approach to investment strategies in financial markets. While models provide a standardized framework, they are not a one-size-fits-all solution. Advisors can customize them based on a client's risk tolerance, financial goals (e.g., income-focused models for retirees), and preferences (e.g., tax-focused strategies). 

Today’s asset management shops use a combination of quantitative and qualitative screening methods to select securities and construct model portfolios. This rigorous, multi-faceted process aims to identify high-conviction strategies, manage risk, and align with various client objectives. A common thread is quantitative analysis.The data-driven method uses objective, measurable metrics for initial screening and benchmarking. This is where screens and alpha criteria enter the picture.Let us provide an example from the disciplines used by our sister company, ValuEngine Capital Management. 

We start simply with the ValuEngine View Strategy.This is the model portfolio used for clients with medium-to-high risk tolerances and medium-to-long time horizons.The objective is to create a diversified portfolio of 50 stocks with expectation of superior returns.Therefore, the screens focus on the ValuEngine ratings for each stock with secondary focuses on valuation and volatility.The following is verbatim from the ValuEngine Capital Website:

“The ValuEngine View Strategy is the product of a sophisticated stock valuation model that was first developed by ValuEngine’s academic research team. It utilizes a three-factor approach: fundamental variables such as a company’s trailing 12-month Earnings-Per-Share (EPS), the analyst consensus estimate of the company’s future 12-month EPS, and the 30-year Treasury yield are all used to create a more accurate reflection of a company’s fair value. A total of eleven additional firm-specific variables are also used. The ValuEngine View portfolio is constructed by integrating this model along with some basic rules for market capitalization and industry diversification.

​Portfolio Liquidity Requirements: Stock must have prices over $5, over 100,000 daily trading volume, and 1 billion in market cap size. This ensures that stocks can be entered and exited easily and quickly.

​Screening Criteria: Strong Buy and Buy rated, top forecasted target price stocks for the next month according to ValuEngine (ValuEngine.com) propriety research and models. Must also be at least 1% undervalued by the ValuEngine Proprietary Valuation model.This means it is a combined approach utilizing both proprietary forecast target price and valuation models. The portfolio is adjusted monthly and contains 20 positions. An equal amount of capital is allocated to each stock, with a small cash position.

​The portfolio manager does at times make manual adjustments. For example, adjusting the number of stocks in a given sector if the model results are too heavy in one or more sector groups. The portfolio manager also reserves the rightto replace a stock with another one from the screening results if there are issues that are not accounted for in the models.Chinese ADR stocks (foreign stocks that trade on US markets) are currently not included, due to volatility. ADR's from other countries are permitted."

Those interested in delving further into this example may do so at valuengine.com, then clicking on the Strategies tab.There you can also find construction methodologies used for more conservative and income-oriented portfolios along with historic performance records. 

The screening tools can be found on the ValuEngine website in the “Portfolio Construction” section for professional investors.Performance tracking and optimization tools can also be found there. 

Using the professional tools on the ValuEngine website, we can follow the above rules and criteria to create a 20-stock portfolio using the ValuEngine ratings.  Altogether, we find 110 stocks that satisfy this screen. We download the results into a spreadsheet to make it easy to create reports and to view and manipulate the data. If we were creating a new 20-stock portfolio today using the ValuEngine View rules and constraints, this is what it would look like:

In terms of sector representation, the most represented is Foreign Banks with 4: BNP Paribas ADR (BNPQY), Banco Itau (ITUB), Erste Group Bank (EBKDY) and UBS Group (UBS).Next in line is technology with three companies, IHS Holdings Ltd. (IHS), Stoneco Ltd (STNE); and Unity Software (U).No other sector has more than two companies so on an eyeball basis, it seems diversified enough for a 20-stock portfolio.However, some investors may review these names and see a different type of concentration problem. 16 of these 21 companies are ADRs.Only SSR Mining (SSRM), Unity Software (U), Progyny Inc. (PGNY) and Wayfair (W) are based in the USA while El Dorado Gold (EGO) is Canadian.A helpful feature of the ValuEngine professional screening tool is it outputs 30 data elements, accounting for much of what appears in the ValuEngine report, for each stock that satisfies the screen. One of those data items is Country Code which designates where the company is located.So, using the same spreadsheet but eliminating companies not headquartered in the US, here is the new top 20, as follows:

Although the average 1-month forecasted price gain went down considerably for this 20-stock portfolio, we were able to stick with all stocks rated 5 (Strong Buy).Five of the 20 companies are in the Health Care Sector but only three are in the same industry, which is Biotech: Liquidia Corp. (LQDA), Adaptive Biotechnologies (ADPT), and Halozyme Therapeutics (HALO).The next most represented sector is energy with three. It is populated by the stocks of nontraditional energy providers such as Sunrun (RUN) and Shoals Technologies (SHLS).alongside a more traditional provider, National Fuel Gas (NFG). In both the above charts, I included our valuation model’s relative rank alongside P/E, the most popular valuation metric.Our valuation model can be thought of as focusing on how much the stock is selling at a discount or premium to “fair value” focusing on potential future returns. The P/E metric is a simplification, focusing on share price relative to historical earnings per share. Only seven of these stocks P/Es below that of the S&P 500, currently 27.9 according to YCharts.The lowest P/Es are owned by two energy stocks just mentioned, RUN and NFG.Interestingly, nine of the 20 have P/E ratios considered undefined as historical earnings are either negative or zero.  Investors relying on P/E therefore do not recognize these stocks as the mispricing opportunity that the ValuEngine valuation model predicts it to be. 

Going back to providing model portfolios, there are a few very volatile and non-dividend paying stocks here that may not be appropriate stock portfolios for moderately conservative investors.Accordingly, here are new screening criteria that are more appropriate for this target group:  

1. Eliminate non-dividend-paying stocks as just the fact that a stock pays a dividend has been cited in studies as a stability factor;    
2. Eliminate stocks with a Beta higher than 1.50 to mitigate volatility.
3. Eliminate non-European ADRs.

The other criteria still apply.Only 53 stocks now qualify.Here is the new portfolio. 

The new portfolio contains more familiar names, lower average forecast of one-month price gain and is more than 50% comprised of 4-rated (Buy) stocks.It averages stocks with higher dividend yields, lower forward P/E ratios and lower Betas (not shown for readability). The largest concentration is in finance with six stocks, five of them in the insurance industry.The rest of the diversification looks good with the three tech stocks comprising the next group. 

Screens like these can form good bases for creating model portfolios. This works well for quantitatively indexed portfolios and ETFs that display their decision rules.Broader screens allow more room for active managers to tweak portfolios by substituting lower ranked stocks that still pass the screen for stocks they believe are more risky than the stories told by the numbers themselves.As actively managed ETFs continue to dominate new ETF offerings, there should be ample room to combine quantitative decision criteria with experienced oversight.

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