A Ranking system sorts stocks from best to worst based on a set of weighted factors. Portfolio123 has a 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 "ValueRank" in this article.
The "ValueRank" ranking system is quite complex, and it is taking into account factors like; five years average yield, ten years compounded sales growth, the latest price to book ratio, the trailing twelve month PE, price to sales, and return on equity.
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 "ValueRank" 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 16.0%, while the average annual return of the Russell 1000 index during the same period was 3.55% (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 "ValueRank" ranking system on all Russell 1000 stocks on October 08, I discovered the twenty best stocks, which are shown in the table below. In this article, I will focus on the first-ranked stock; GameStop (GME).
GameStop is a global multichannel video game, consumer electronics and wireless services retailer with more than 7,000 stores worldwide. The company sells new and used video game hardware, video game software and accessories, as well as PC entertainment software, related accessories and other merchandise.
GameStop Stock Performance
Year-to-date, GME stock is down 4.9% while the S&P 500 index has increased 5.4%, and the Nasdaq Composite Index has increased 5.7%. Moreover, since the beginning of 2012, GME stock has gained only 10.6%. In this period, the S&P 500 Index has increased 71.3%, and the Nasdaq Composite Index has gained 103.2%. However, according to TipRanks, the average target price of the top analysts is at $34.50, indicating an upside of 29.3% from its October 7 close price, which appears reasonable, in my opinion.
GME Daily Chart
GME Weekly Chart
Charts: TradeStation Group, Inc.
Dividend
The annual dividend yield is high at 5.55% and the payout ratio only 38.3%. The annual rate of dividend growth over the past three years was very high at 21.6%.
Valuation
Regarding its compelling valuation metrics, GME stock, in my opinion, is considerably undervalued. The trailing P/E is very low at 7.03, its forward P/E is even lower at 6.31, and its price-to-sales ratio is exceptionally low at 0.30. GameStop's price to cash flow ratio is very low at 4.94, and the Enterprise Value/EBITDA ratio is extremely low at 4.04. Furthermore, its PEG ratio is very low at 0.65. The PEG ratio - price/earnings to growth ratio - is a widely used indicator of a stock's potential value. It is favored by many investors over the P/E ratio because it also accounts for growth. A lower PEG means the stock is more undervalued.
Conclusion
GME stock is ranked first among all Russell 1000 stocks according to the "ValueRank" system. Regarding its compelling valuation metrics, GME stock is considerably undervalued, the EV/EBITDA ratio is extremely low at 4.04, and the PEG ratio is very low at 0.65. The company also pays a generous dividend currently yielding 5.55%. The average target price of the top analysts is at $34.50, indicating an upside of 29.3% from its October 7 close price, which appears reasonable, in my opinion.
