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How To Differentiate 'Highly Valued' From 'Overvalued' Stocks To Beat The Market - Part 2

Ryan Telford profile picture
Ryan Telford


  • When the market is in a phase of rich valuation, it is tempting to broadly identify the market for these stocks as “overvalued”.
  • Making the distinction between stocks deserving high valuations and those that are overvalued is key, particularly in the current market.
  • In part 1 of this series, we looked at fundamental factors based on financial statements to help us make this distinction.
  • In this piece, I share a new strategy I’ve developed, the “A_Score”, that exploits market “anomalies” to find outperforming stocks with high valuations.
  • We look at the strategy and its performance in detail, and I provide some high and low scoring names by the A_Score.

Stock market bubble, stock share price rising up from speculation from greedy investor or overvalued company concept, greedy businessman investor blowing bubbles with dollar sign money into the air.
Photo by Nuthawut Somsuk/iStock via Getty Images

In Part 1 of this series, we looked at how to potentially find winners in the universe of stocks with high valuations. We discussed how it is important to separate valuation from "valuation sentiment" - i.e., stocks with high

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Ryan Telford profile picture
A reader summed up my approach by referring to me as the "intellectual avenging angel".I am an individual investor who is obsessed with finding opportunities for alpha. I invest exclusively in quantitative strategies, through the use of current and historical data, and by looking at a group of stocks rather than individual securities. Using data to inform investing decisions rather than the narrative of the day can provide a real edge.  I am very passionate about separating the truth from the noise, and uncovering true opportunities that others have missed.I research and develop all of my own alpha generating stock trading strategies using Portfolio123.I invite you to join me on my investing journey, where we will learn about all things quant in the never-ending quest for alpha!Click the “Follow” button above to receive notifications of my new articles!

Analyst’s Disclosure: I am/we are long CRWD, ZM, SNOW. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This article is for informational purposes only. I am an individual investor and writer, not an investment advisor. Readers should always engage in his or her own research and consider (as appropriate) consulting a fee-only certified financial planner, licensed discount broker/dealer, flat fee registered investment adviser, certified public accountant, or specialized attorney before making any investment, income tax, or estate planning decisions.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (11)

Fantastic research! One question: you use change of short interest as the A3. Have you tried use change of A1, A2 or even parameters in G_Score as the criteria? Thank you!
Ryan Telford profile picture
@LeadG thanks for reading! While I do look at how factors change over time in my strategies, I've not looked specifically at the lottery effect or beating expectations. One factor I use quite often is how estimate revisions change. I'll look closer at the rate of change of A1 & A2.

I have combined the G_Score and A_Score, i.e. screen stocks with G_Score>=7 and A_Score >=2, with some positive results, however I haven't tested very rigorously.

I have a few research projects on the go, one related to the G_Score and profitability and growth - how to define "good growth" vs "bad growth", or more specifically "value creation" vs "value destruction" through the frame of "growth".
@Ryan Telford Thank you! Look forward to your future research!
Advill profile picture
You got a new follower, is the first time I read your articles a lot of work.
Your system by the way is quite similar to the basic analysis that many fund does to evaluate an investment.
Ryan Telford profile picture
@Advill thanks for reading and following! Admittedly, these articles are a lot of work, but it's a process I enjoy, and I hope readers can learn something from them, as do I.
Super article. Very surprised (and worried) to find a lot of good names in the naughty list (MSFT, TCM, NVDA, PINS, NFLX, ADBe etc)
Ryan Telford profile picture
@Nereida1976 , thanks for reading. Yes, some high profile names do have low ratings on the A_Score. Of the stocks you noted, most have increasing short interest.

For comparison, ADBE scores a 6 on the G_Score (out of 8), the balance between 4 and 5. We'll look closer at the combined scores in the next piece.
SkiTheGoodStuff profile picture
Really enjoy reading your articles, including this one. I don't mind the length; I really like the additional information.
Ryan Telford profile picture
@SkiTheGoodStuff , thanks for reading and following along! Good feedback on the length and detail.
kayak1 profile picture
Thanks for writing but I found it veryyyy long
Ryan Telford profile picture
@kayak1 , thanks for reading. Generally my articles are longer, my research covers a lot of ground. This one was actually a shorter one ;-). Thanks for the feedback though; some readers have commented on the length of my pieces, other appreciate it. Finding the balance is key.
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