What is a quality score for stocks?
A quality score is a way of ranking stocks by how strong the company and its stock look on a fixed set of measures. The result is one number or grade, so that thousands of stocks can be compared at once. The measures come from three long traditions in investing research.
Profitability: companies that turn more of their sales into profit. A 2013 paper in the Journal of Financial Economics, Robert Novy-Marx's "The Other Side of Value: The Gross Profitability Premium," found that more profitable companies earned higher returns on average than less profitable ones, over decades of US data.
Safety: companies with steady earnings, little debt, and shares that swing less than most. Growth sits beside it: sales and profits that are rising.
Momentum: stocks whose prices have risen over the past several months. Narasimhan Jegadeesh and Sheridan Titman documented it in 1993 in the Journal of Finance ("Returns to Buying Winners and Selling Losers"): stocks that had risen over the past three to twelve months went on to beat those that had fallen, on average, over the following months.
The academic anchor for the word itself is "Quality Minus Junk" by Clifford Asness, Andrea Frazzini, and Lasse Heje Pedersen, published in the Review of Accounting Studies in 2019. It defined a quality stock as one that is profitable, growing, safe, and well run in what it pays out, and measured how such stocks did against their opposites, which the authors called junk.
How stock scoring systems work
Most scoring systems take the same three steps. First, pick the measures: profit, debt, sales growth, the price trend, and so on. Second, turn each measure into points, either against a fixed line (a profit or a loss) or against every other stock (the top fifth on sales growth). Third, add the points up, sometimes with more weight on some measures than others, and sort the stocks by the total.
What a score means depends on those choices. A score built only from the books says nothing about the chart, and one built only from the chart says nothing about the business. A score worth reading says what goes into it, recomputes it the same way for every stock, and keeps a record of how the stocks it ranked highest did afterward.
Breakaway's Quality Score
Breakaway scores every US stock that trades enough shares each day. Each one is run through 14 chart checks and gets a Quality Score. The Quality Score weighs trend, size, profit, sales growth and margins, share dilution, big daily swings the business does not back, cash flow, run-up, news, insider trades, government filings, and persistence. Run-up is the gain the stock has already made. Persistence is how long the score has held up. The list refreshes every 15 seconds and puts the highest Quality Scores first. The Quality Score is the badge on every card and the number the grid is ranked by. The check count alone only says how many of the 14 checks are firing today. That is accurate and short-sighted at the same time. A broken stock bouncing inside a two-year decline can light eight checks in a good week. The Quality Score exists to fix that.
How it is built
The Quality Score starts from the check count and adds trend quality, from minus three to plus four. Points come from being above the 200-day average, from a rising 200-day average, from being near the 52-week high and from being at a multi-year high. Points are taken away for being down over one year and over two years. Size adds two points for a mega cap at $200 billion and one for a large cap at $10 billion. It takes one point away for a micro cap under $300 million. Run-up is the gain already delivered. It adds two points for a stock up 100 percent or more over the last year, or up 60 percent over the last six months. It adds one point for a stock up 30 percent over six months. A stock listed for less than six months has no six-month return, so it earns nothing there. Profit adds a point for a company that made money over its last four quarters, and a second point when that profit grew 20% or more on the four quarters before, or when the company turned its first profit after a loss. A loss takes one away, unless the loss shrank by a fifth, which scores nothing either way. All of it comes straight from the SEC filings. A move in a business that earns money has a better record of lasting. A company with no quarterly filings is read on its last fiscal year instead. Growing sales and widening margins add points. Heavy share dilution, big daily swings the business does not back, and cash burn take points off.
Then come the outside signals. News, read together with the company's 8-K filings, and insider trades are each worth up to three points either way. Government filings are worth up to two, or three when a closely followed filer such as Pelosi or the president is among them. Insider trades are read against the stock's 52-week range. A sale within a few percent of the 52-week low counts against the stock much harder than routine selling near a high. A buy near the low counts for more. When an officer or director sells into the 52-week low, this part of the score is held at minus one or worse. The ticker page says so in plain words, because a chosen sale at the low means the insider has lost faith. An earnings beat or miss, and a change in the company's forecast, are scaled by how the stock reacted to the report. A lasting event such as an earnings report, a contract, an approval, or a share offering that dilutes owners keeps counting for twenty days. An analyst note counts for five.
A check or a step that sits on a price line holds once it is earned: it lights at its line and goes off only when the price clears a wider one, so a small dip does not take it away. Near the 52-week high lights within 5 percent and holds until the price is more than 8 percent under the high. A 30 percent run-up over six months holds its point until the gain is under 25.5 percent. The 200-day average has no band: a close under it costs its point that day, and a fall of 10 percent still costs nearly every point it always did. The checks that read the day's bar count on the finished day; heavy volume is one of them. During the session they keep the last close's answer, and the full count comes once the close is settled, at 4:15 PM ET.
Last comes persistence, worth up to two points. It is the one part that describes weeks instead of today. It takes the median, or middle value, of the stock's last twenty recorded scores. A median of 12 or more earns two points and 9 or more earns one. Under ten days on record it pays nothing, and it never goes negative.
Put it together and NVDA at a new high, with an earnings beat and insider buying, can reach a Quality Score around twenty. A micro cap on a rumor with the same seven chips lit stays in single digits. The ticker page puts a plain word on the total. Exceptional is 20 and up, Excellent is 15 to 19, Above Average is 11 to 14, Average is 6 to 10, Below Average is 0 to 5, and Poor is below zero.
How ties are broken
Stocks are ordered by the Quality Score first. When two of them tie, the one that scored higher the session before goes first, so a stock that slips a point lands right under the stocks it was tied with, and one that rises a point lands right over its old ones. Next comes the one that held its score more firmly at the last close: each price line it has lit is measured by how far the price sat past the line that would turn it off, and each one it has not lit by how close the price sat to the line that would light it. If they still tie, the stronger long-term trend goes first, then the bigger six-month gain, then the larger company, then the symbol. The order is the same on every page: the scanner, the stock page, and your watchlist. Inside a score it is set at the close, so tied stocks keep their order all session.
Why it matters
Big companies have earnings, analyst coverage, index money, and institutional ownership. A breakout in one of those has earnings and big buyers behind it that the same chart on a small, lightly traded stock does not. Ranking by quality puts the strongest of those at the top without hiding the small companies. They still score, they still appear in every list, and they still rank when their trend and signals earn it. This is a way of ordering a list. It is not a recommendation to buy anything on it.
Quality Score vs a stock rating
An analyst's rating is one person's view of one stock, often with a price target. A letter grade from a research firm is usually a rank against other stocks on a few measures. The Quality Score is a formula: the same parts, read the same way, for every stock Breakaway scans, every 15 seconds while the market is open, with each point shown on the stock's page. How the three kinds differ is in Stock ratings explained.
How the score was tested
Breakaway keeps the score's record in the open: how the stocks it scored highest did afterward, against every stock it scanned, and the limits of the test. The figures are below, and the whole method is on the page How the Quality Score was tested.