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Why A Low SFTW Investor Safety Score is Not “Bad”
Posted on August 15, 2016 by Andy Hayes

One misconception I encounter often when reviewing our SFTW Investor stock recommendation app is regarding high and low safety scores.  To refresh your memory, the safety score uses a variety of data points to calculate this figure, a number from 0-100.  The higher the safety score, the higher the likelihood that this stock is poised for long-term growth.  The lower the safety score, the lower the likelihood that this stock is poised for long-term growth.

Sometimes, investors assume that a low safety score means the stock is “bad.”  That’s not necessarily true (and as most things in life, rarely can stocks be painted in black and white terms).  Here’s a great example – recently, our daily stock recommendations included a stock with a score of 99 (Mylan) and a score of 7 (Tesla):

sscore-recommends
For Example Only

 

If you were playing the game “one of these things does not belong,” you would be quick to point out that Tesla is nowhere near the top of these scores.  So, what does it mean when a stock with a low score has a daily recommendation?  It means that the stock is showing signs of potential long-term gains; the lower score simply means the likelihood of growth isn’t as high as the stocks with higher scores.

This is a perfect illustration of why you cannot simply look at one data point to make a investing decision.  If you simply looked at safety score, Tesla might not look that appealing.   But, consider these scenarios:

  • For example, say one of your values is about green investing, and so you prioritize investing in companies helping to make more environmentally-friendly products.  That would make Tesla more appealing than the other products.
  • Or, for example, perhaps you already have heavy investments in social media companies, and you want to diversify your portfolio across sectors.  Tesla would then become more appealing than Facebook, in this lineup.

Safety Scores are a Range for  a Reason

We get emails all the time asking about what is a “good” safety score (or conversely, is this score “bad”) and we always say that safety scores are a range to provide a comparison between stocks in our database – there is no good or bad safety score. 

Use the safety score as a strong indicator of potential future performance in a stock, but don’t use it as a crutch.  Review the stock fundamentals.  Review the historical performance.  Read the newsfeeds of the stock.  The best investments are made with multiple data points of reference.

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Written by Andy Hayes

is a lifestyle expert and runs his own online magazine, Plum Deluxe. Andy is based in Portland, Oregon.

 
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