Explanation of MATS, The Market Adjusted Total Score – what it is, it’s purpose and how it works:
This is basically a tool for revealing the performance of two different aspects of a company, its financial performance and its historical stock prices. Each of these two aspects are given an individual score from a specific calculation which is further described below. These scores added together gives The Market Adjusted Total Score. The score needs to be compared to the score of other stocks, groups of stocks, sectors etc. The score alone, seen separately, will not be of any meaning. In other words, the score will be of great use as a stock ranking tool, and it may be applied on any company which is noted on a stock exchange. It is developed solely for the purpose of giving the investor a quick and reliable, quantified impression of a stock, whether he/she considers to buy, to sell or to hold. Or whether a neutral and objective, quantified review of a favourite stock is needed.
The unique about MATS, is that in addition to a financial score based on the most recent financial numbers, the model takes into account the development of a company’s stock quote. It also adjusts for a stock quote’s development vs the main index in a market (e.g. the S&P 500). History tells us that most likely, a stock quote will get back to it’s earlier price levels at some point. Whether we like it or not, psychology affects the market in a huge manner, especially in short/medium term, and that is why earlier price levels very often will be part of a stock’s price movement in the future. And these facts should not be underestimated. Most technical indicators only take into account a stock quote’s historical development, and on the other hand most financial indicators only take into account the fundamental financial numbers delivered by the company. The Market Adjusted Total Score (MATS) takes into account both.
A score which easily shows the ratio between a stock’s financial performance and its historical prices:
- Financial performance: This starts with a calculation of Earnings Yield (EY) and Return On Invested Capital (ROIC), well known as performance/efficiency indicators. These numbers are added together (e.g. 12 % + 17 % = 29 points). In addition, these numbers are adjusted if Net Working Capital (NWC) exceeds 50 % of the market cap value (eg. if NWC is 60 % of the market cap, 10 points are added. If NWC is 90 % of the market cap, 40 points are added). This leads to the Financial Score.
- Historical prices: The scores are further adjusted for the stocks’ market price during the last three years (e.g. a company with a 50 % lower stock price than the highest level in the last three years, is added 25 points). Finally the numbers are adjusted to their development towards a leading market index, e.g. the S&P 500 Index (if the leading market index is at its highest levels in three years, every stock will get close to zero or more points as a discount related to the index).
How will the stock prices affect the Market Adjusted Total Score (MATS)?
The easiest way to explain this, is with an example from week 4, 2018’s Top Bargains Watch List . As you can see, AGX gets a MATS score of 93,3, even though its Financial Score is as high as 73,6. AGX’s stock price is at 60,5 % from its highest levels in three years, so it gets only about 20 points added to its Financial Score (100-60,5=39,5). Half of this is 19,75. This will result in a MATS of 73,6 + 19,75 = 93,3. Another company, AMAG, gets a MATS score of 122,3, even though its Financial Score is only 49,7. AMAG’s stock price is at only 18,3 % from its highest levels in three years, so it gets as much as nearly 48 points added to its Financial Score (Explanation: The “Added Value” of 31,7 (50 minus 18,3) points in the table is added a factor of 1,5, this gives about 48 points). Another 25 points is added because of its market discount related to the S&P 500 Index (100-50=50). Half of this is 25. This will result in a MATS of 49,7 + 47,6 + 25 = 122,3. In this case, AMAG gets a MATS which is nearly 30 points higher than AGX, even though AGX had a Financial Score 24 points higher than AMAG.
This document contains an Excel spreadsheet with a calculation that leads to the MATS Score of a stock, in this case GameStop Corp. (NYSE:GME). Open this document and feel free to change the values of the different parameters, to see how it affects the score (in Dropbox, click “Open” and choose e.g. Excel Online to make it dynamic).
Explanation of parameters used in the spreadsheet:
*Market Discount: If the stock has fallen (or risen) more than the market, a factor of 0,5 is used into the “Market Adjusted Total Score” area to adjust for the difference.
*Added Value: If >50 % discount from the highest price last 3 years, a factor of 1,5 is added to this difference into the “Total Score” area.