Quantitative analysis of stocks

Quantitative analysis in general is simply a way of measuring things. In quantitative analysis of stock, the behavior of a stock is analyzed using complex mathematical and statistical modeling equations. For analysts who specialize in quantitative analysis of a stock, the business or the management mean nothing to them. There is no regard for underlying business at all. All they look for are the numbers.

While the fundamental analysis f stock look at various factors like business, growth, competition, management effectiveness etc, the quantitative analysis discount all these factors since all of these are subjective terms. People will have different definition of conclusion about the management of a particular business and it all depends on how they see it or rather how management presents itself to them.

For quantitative analysis, the number crunching is done through advanced computers now days. These people who do this are also called as quants. These quants will do analysis based on complex formula and will decide on sell versus buy option purely based on these equations and numbers. Some of the major considerations while doing quantitative analysis of stock are:

Company size – First thing which the investors look at is the size of the company. This is usually done in term of capitalization or ‘cap’ in short. Broadly, the companies are divided into various caps depending upon their market. These are micro cap, small cap, mid cap and large cap. Smaller the cap, riskier is the company since it can go bankrupt very easily. But smaller companies have the chances to grow radically as well. Broadly, the guidelines of distinguishing these caps are:

Large cap — $10 billion or more.

Mid cap — $2 billion to $10 billion.

Small cap — $250 million to $2 billion.

Micro cap — $250 million or less.

Criteria based or screen based investing – Some analysts use a filter or criteria to select the company which they want to trade on. These criteria are based on quantitative factors. Again this is done using computers since the selection is done pretty fast.

Momentum of the company can also be used as a deciding factor. Some companies are just doing well for a few quarters in a row which make people believe that company is in good shape. These companies usually outperform other companies in short run and everyone would like to buy stock of this company.

Another interesting topic in quantitative analysis is something called as CANSLIM. CANSLIM is a system pioneered by William J. O’Neil that is a hybrid of quantitative analysis and technical analysis. CANSLIM has an interesting acronym. C and A stand for current and annual earnings, N stands for new (new product or new market), S stands for small cap and large volumes, I for institutional ownership and M for market momentum. All these factors are used to decide buy or sell of a company.