A Ranking system sorts stocks from best to worst based on a set of weighted factors. Portfolio123 has a powerful ranking system which allows the user to create complex formulas according to many different criteria. They also have highly useful several groups of pre-built ranking systems, I used one of them the “Momentum Value” in this article.

The “Momentum Value” ranking system is quite complex, and it is taking into account many factors like; yield, price to book value, P/E ratio, price to sales, return on equity, sales growth and relative strength. This system finds value plays with prices moving upwards. The rank is a combination of value factors and momentum factors. The value factors make up 60% of the rank and the momentum factors make up 40% of the rank, as shown in the Portfolio123's chart below.

In order to find out how such a ranking formula would have performed during the last 17 years, I ran a back-test, which is available by the Portfolio123's screener. For the back-test, I took all the 6,287 stocks in the Portfolio123's database.

The back-test results are shown in the chart below. For the back-test, I divided the 6,287 companies into twenty groups according to their ranking. The chart clearly shows that the average annual return has a very significant positive correlation to the “Momentum Value” rank. The highest ranked group with the ranking score of 95-100, which is shown by the light blue column in the chart, has given by far the best return, an average annual return of about 19%, while the average annual return of the S&P 500 index during the same period was about 3.1% (the red column at the left part of the chart). Also, the second and the third group (scored: 90-95 and 85-90) have given superior returns. This brings me to the conclusion that the ranking system is very useful.

After running the “Momentum Value” ranking system on all S&P 500 stocks on October 29, I discovered the twenty best stocks, which are shown in the table below. In this article, I will focus on first-ranked stock of the system; Best Buy Co., Inc. (BBY).

BBY Stock Performance

Year-to-date, BBY's stock is already up 27.4% while the S&P 500 index has increased 4.0%, and the Nasdaq Composite Index has gained 3.6%. However, since the beginning of 2012, BBY's stock has gained only 65.9%. In this period, the S&P 500 Index has increased 69.1%, and the Nasdaq Composite Index has gained 99.2%. According to TipRanks, the average target price of the top analysts is at $39.83, which indicates an upside of 2.7% from its October 28, close price, however, in my opinion, shares could go even higher.

BBY Daily Chart

BBY Weekly Chart

Charts: TradeStation Group, Inc.

Dividend

The annual dividend yield is at 2.89% and the payout ratio is only 32.9%. The annual rate of dividend growth over the past five years was high at 9.7%.

Valuation

BBY's valuation is very good, the trailing P/E is very low at 12.63, and the forward P/E is even lower at 12.08. The price-to-sales ratio is extremely low at 0.31, and the price-to-free-cash-flow ratio is also very low at 10.40. Furthermore, the PEG ratio is low at 1.11, and the Enterprise Value/EBITDA ratio is very low at 4.16. According to James P. O'Shaughnessy, the Enterprise Value/EBITDA ratio is the best-performing single value factor. In his impressive book "What Works on Wall Street," Mr. O'Shaughnessy demonstrates that 46 years backtesting, from 1963 to 2009, have shown that companies with the lowest EV/EBITDA ratio have given the best return.

Conclusion

BBY's stock is ranked first among all S&P 500 stocks according to the powerful “Momentum Value” ranking system. BBY has a compelling valuation, and it generates strong free cash flow and returns substantial capital to its shareholders by stock buybacks and increasing dividend payments currently yielding 2.9%. All these factors bring me to the conclusion that BBY's stock is a smart long-term investment.