What Was the Investability Quotient (IQ)?
The term Investability Quotient (IQ) refers to a proprietary tool developed by Standard and Poor’s (S&P) that evaluated a stock's investment characteristics across a universe of companies. The IQ indicated a stock’s medium- to long-term return prospects as well as its downside risk potential
It factored in a number of elements in its assessment and assigns a single number to rank the stock against its industry peers. S&P Global now offers a platform called S&P Capital IQ, which offers a wide range of information and analysis tools for analyzing publicly traded companies and financial markets.
- Investability Quotient was a proprietary system developed by S&P in order to evaluate stocks.
- The rating system factored in company credit ratings, the liquidity of their assets, their health and strength, and industry volatility.
- Companies were given a rating between one and 250 based on these factors.
- The IQ scoring system is now rolled into comprehensive analysis platforms, including S&P Capital IQ.
How the Investability Quotient (IQ) Worked
Standard & Poor’s launched its Investability Quotient (IQ) system in 2001. The system joined the ranks of the company's existing proprietary tools, analysis, data, platforms, and applications. As such, it was the company's proprietary method of ranking investments in terms of performance and potential risks.
In order to rank a stock, the IQ took a number of factors into account, including:
- A company's credit rating
- The liquidity of its assets
- The relative health and strength of the company
- The volatility of the industry at any given time
By incorporating these basic fundamentals, the system derived a single number to indicate how well a stock may perform over time along with any associated risks to that particular investment. The rating assigned is anywhere between one (worst) and 100 (best). The IQ measure allows analysts and investors to compare a stock with its peers and helps them to make cross-industry comparisons easily.
IQ is now wrapped up in a much larger collection of tools called S&P Capital IQ. It is an exhaustive platform containing tools, scanners, research, charting, ratings, analytics, valuations, financial statement data, as well as other features.
Investors were cautioned to use the system as a tool rather than a guide to choosing investments because company ratings change.
S&P’s IQ tool was based on two of its earlier systems. These systems were the Stock Appreciation Ranking System (STARS) and the Quality Rankings system. All of these tools are now part of the S&P Capital IQ platform, along with many other ranking methods, analytics, and scanners.
Stock Appreciation Ranking System (STARS)
STARS generated qualitative coverage of which were publicly traded companies. S&P’s equity research analysts used STARS to rank a company's stock performance potential between six and 12 months.
Stocks were rated using a star-rating system as follows:
- ***** Strong buy or five stars
- **** Buy or four stars
- *** Hold or three stars
- ** Sell or two stars
- * Strong sell or one star
This system was created by S&P in the mid-1950s. It evaluated more than 4,000 common stocks by measuring the growth and stability of a company’s earnings and dividends within a single rank. This system helped both individual and professional investors identify securities that consistently outperform market indices on a risk-adjusted basis.
Example of Investability Quotient (IQ)
S&P Global regularly updates and refines its product offerings. The look and feel of its publications, not to mention how the reports are calculated or generated also change. Keep in mind that ratings change as companies release new data.
Standard & Poor’s company reports are also part of its research products. These reports are generated by S&P’s team of global equity analysts. Each profile contains a small table that displays the issuer's Investability Quotient, along with two other metrics. The image below is an enlarged example of a historical report showing the IQ score of Lincoln Electric Holdings (LECO) at 92.
Investors were able to use the company’s IQ and compare it with its industry peer group. As mentioned, ratings were subject to change and were not meant to be used as standalone indicators to determine the purchase or sale of stocks.