What is Investability Quotient (IQ)
Investability Quotient (IQ) is a proprietary tool developed by Standard and Poor’s (S&P) that is designed to evaluate a stock's investment characteristics across a universe of companies. The IQ indicates a stock’s medium- to long-term return prospects as well as its downside risk potential. The IQ considers elements such as credit rating, liquidity, relative strength, and volatility, and then assigns a single number — zero (minimum) to 250 (maximum) — to rank the stock against its industry peers.
Breaking Down Investability Quotient (IQ)
Investability Quotient (IQ) is S&P’s proprietary method of ranking investments in terms of performance and potential risks. In order to rank a stock, the IQ factors in the credit rating of the company in question, how liquid its assets are, the health and strength of the company, and how volatile the specific industry is thought to be at any given time. By incorporating these basic fundamentals, the IQ system is able to derive a single number (from zero to 250) to indicate how well a stock might perform over time, and what its particular investment risks might be. The IQ measure allows analysts and investors to compare a stock with its peers and helps them to make cross-industry comparisons easily. However, there are a great many ways to evaluate securities, and Investability Quotient is just one of them. Therefore, Investability Quotient should not be viewed as the final word on a stock.
What Determines Investability Quotient?
In 2001, Standard & Poor’s launched its Investability Quotient system, which joined the ranks of S&P’s existing proprietary tools, analysis, data, platforms, and applications. Two of S&P’s earlier systems — Stock Appreciation Ranking System (STARS) and Quality Rankings — form the basis of its IQ tool:
- STARS generates qualitative coverage on almost 2,000 stocks, including more than 1,500 publicly traded companies in the United States. S&P’s equity research analysts use STARS to rank a stock’s performance potential for the coming 12-month period. Since its inception in 1986, the STARS methodology has delivered consistently favorable performance relative to broad market measures.
- Quality Rankings, created by S&P in the mid-1950s, evaluates 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 helps both individual and professional investors to identify securities that consistently outperform market indices on a risk-adjusted basis.
Added to this are the S&P issuer credit rating, plus the three components cited below:
- A proprietary multi-factor statistical model that looks at valuation, profitability, risk, and momentum factors
- A technical element that consists of three-month relative strength
- A liquidity/volatility segment that measures liquidity and downside risk
IQ in Action
Among Standard & Poor’s research products are its Corporate Profile company reports, authored by S&P’s team of global equity analysts. Each Corporate Profile contains a small table on the front page, top-left corner, which displays the issuer's Investability Quotient, along with two other metrics. The image below is an enlarged example of this table*, where you will see in the bottom row that the IQ score of Lincoln Electric Holdings is 92. At a glance, then, the company’s Investability Quotient may be easily compared with its industry peer group.
*This is the most recent version our sources provided.