The Navellier Formula

When it comes to stock analysis or portfolio analysis, Portfolio Grader is an incredibly powerful tool for individual investors. The fundamental and quantitative analysis can't be beat and when it's combined with the added research and stock commentary I've added to this report, you have even more ways to profit and reduce your risk in the quarter ahead.

The Formula

When it comes to finding market-beating stocks on Wall Street, there are two critical characteristics at the center of my stock analysis.

The first is strong fundamentals. By fundamentals, I mean sales growth, earnings growth and the like. Growing companies are companies that are healthy and thriving. They have smart leaders who know how to run and manage a smart business. If a company is struggling to sell its products or is spending more than it makes, it's not a company that you want to own for growth.

The second characteristic I look for in any great stock is strong buying pressure. Think of this as "following the money." The more money that floods into a stock, the more momentum a stock has to rise. And there's no doubt about it, we all like stocks that rise!

Finally, I also like to see a positive ratings trend. Every graded stock in The Portfolio Grader 500 has its own one-page Stock Report. In each report you'll find historical ratings, and this can be a great way to see if the stock is improving or just the opposite, if the stock is weakening. When choosing between dueling stocks, go for the stock with the positive ratings trend.

Our Eight-Point Inspection Plan

On each Stock Report page, you'll see a total grade at the top along with my Buy or Sell recommendation.

That grade is derived, in part, from my 8-point fundamental analysis. Each of the 8 grades is displayed for each stock and here is the complete description of each fundamental variable:

  • Sales Growth

    I like a company that can grow its sales over time. Why? Because it's one number that is hard to fake. My background is in accounting, and I've always made sure to steer away from companies that use questionable accounting practices. Sales growth is a solid indicator.
  • Operating Margin Growth

    This simply tells me if earnings are growing faster than sales. A company that's able to expand its operating margins is usually a company that has a dominant position in its industry. This company can raise prices without seeing a drop-off in sales. That's a nice place to be.
  • Earnings Growth

    This is at the heart of all good financial analysis, and I rely on it as well. As long as any company is able to grow its earnings consistently, its stock will do well.
  • Earnings Momentum

    It's not enough for me to see a company's earnings growth–I also want to see its rate of growth increase.
  • Earnings Surprises

    Speaking of beating earnings, I also look to see if a stock has been able to beat its earnings estimates, and by how much. This is an important number to watch because it often tells me about a stock that Wall Street isn't paying much attention to or doesn't yet "get."
  • Analyst Earnings Revisions

    I like to see stocks that have had their earnings estimates increased by Wall Street analysts. This usually tips us off to a stock that's about to "beat earnings."
  • Cash Flow

    This tells me how much money a company has left over after paying for the costs of its business. Having a strong cash flow is important because it allows a company to invest more resources in growing its business.
  • Return on Equity

    This is the gold standard. ROE tells me how efficiently a company is managing its resources. I can't interview every senior manager at a company, so I like to think of ROE as a report card for management.

All of these factors come together to form the total Fundamental Grade. I then combine that with my Quantitative Grade—which measures buying pressure, market sentiment and a few other important variables—and gives us the Total Grade which determines my Buy or Sell rating on the stock.