Using the Ziggma Company Performance Scores we wanted to know which one of the major indexes had the better companies overall. It turns out the NASDAQ 100 beats the S&P 500 by a wide margin. This does not come as a surprise against the backdrop of the success of the tech, consumer services and health care sectors. We were surprised, however, by how big the difference turned out to be.
Comparison using the Ziggma Performance Score
We compared the respective index constituents using the median Company Performance Score calculated by our company analytics engine. This proprietary algorithm, which combines decades of experience in fundamental financial analysis and big data analytics runs through close to 30 key performance indicators and accounts for various industry specificities, notably in the banking, insurance and real estate sector.
This is the impressive result:
The much higher median score of companies in the NASDAQ 100 reflects the higher overall quality of companies in the index relative to the S&P.
6% of the companies in the NASDAQ 100 get a full CP score of 100 versus only 2% in the S&P 500. In fact, due to the overlap between the two indexes, there are only 4 companies in the S&P 500 with a CP score of 100.
Index performance underscores the differenceThe better overall quality of companies in the NASDAQ 100 is more than reflected in its relative outperformance against the S&P, as can be seen in the chart below through 31 March 2020.
What conclusion to be drawn from this?
Maybe just buying the market, which is generally understood as buying the SPY (the main ETF on the S&P 500) is not the best idea after all. As the chart shows, looking for the winners, or at least the winning index, can be very lucrative and worthwhile.
Leverage data and technology combined with extensive experience in financial analysis.
But how to identify the best performing companies out of tens of thousands of companies in various industries - whereby each company in turn must be evaluated based on a large number of key performance indicators and their evolution over time?
We believe that a well-designed stock rating or scoring system is best suited to reflect companies’ relative economic performance and prospects and thus identify the best companies. Institutional investors have employed this type of analytical approach for decades.
Not all company scores or ratings are created equal.
You may have noticed our emphasis on the term “well-designed”. This is because it takes a tremendous amount of experience working in finance and preliminary research to be able to construct a robust model. There are many specificities between industries, data anomalies and algebraic issues to address and solve before being able to generate Company Performance Scores that consistently hold up. Our professional background as financial analysts and expertise in data science has helped us a great deal in this endeavor.
Combining this work with the recent leaps in data processing technology makes it now possible to render such professional-grade scores available to the broader public. This is what we have set out to do at Ziggma. Among other things.
Stay tuned for more details about Ziggma’s Company Performance Score.