To develop the EQR Model, we started by identifying the variables found to be significant in academic research and in Gradient’s own analyst driven and empirical research. From these variables, the Gradient’s research team selected the most salient accounting factors that are associated with a firm’s future returns.
The Gradient variables were then quantified and backtested by Sabrient’s research team, led by David Brown, founder and chief market strategist, to find those that have the highest correlation among financial statements and negative events. The final variables were sized and scaled in such a way as to avoid “false positives.” The most correlated ones became the model for the EQR rankings.
The universe for the EQR rankings is 3,000 of the largest market capitalization (≥ $150 million) , publicly traded companies on the U.S. stock exchanges narrowed by a stock price minimum of $2. NOTE: Utilities, Investment Trusts, Holding Companies, Banking & Investment Services, and Insurance stocks are not ranked by EQR.
Using the EQR model, each company receives an EQR Rank and a percentile score.
Each company is first given a percentile score of 1 to 99 relative to the total universe of stocks. The percentile scores are distributed into five groups to determine the EQR Rank. Clients may also use the percentile scores to build their own distributions. Higher scores indicate more conservative (favorable) accounting practices.
The percentile scores are distributed as follows for the final EQR Rank: