Seeking Alpha has always been a fairly good resource for information on the market, as well as tracking down your next stock idea, but with the recent addition of a paywall on most of their articles, is a premium membership worth it? More importantly, is the “Quant Rating” feature that they seem to tout around their website an actually valuable tool?
Well, that’s what we will be reviewing today. I’ll preface this review by saying that I have only signed up to Seeking Alpha Premium yesterday, so I won’t be able to give you a straight answer today, but I will be updating this review over time.
I’m also going to mention that I will NOT have any affiliate links in this review, nor am I receiving any compensation from anyone for writing this review. The downside of this? I’m not going to make a dime from this piece of content, but the upside is that I can be brutally honest with you.
A typical Problem With Stock Picking Services
None of us are strangers to being advertised various stock pick memberships, whether it be Zacks, Motley Fools, or Seeking Alpha.
I’ve personally been a subscriber to Motley Fools for the past year, and while the service was interesting, there was a few major flaw to their whole system:
- The focus on growth stocks
So here is the deal, all these online services want to select the next stock that will 10x, 20x, maybe even 100x. If that happens, they now have the perfect material to attract new customers. Potential customers don’t want to hear that you’ve returned 225% over the course of 10 years, they want to hear about those 10,000% returns.
Well, you can’t have that if you focus on solid companies, with actual earnings, and staying power. The only way to hunt down such stocks is by selecting any stock under the sun that is exhibiting an ounce of strong growth, and hope that down the line, that company becomes a behemoth in their industry.
- Unrealistic backtesting results
You see this all the time, “had you invested with us, instead of the S&P 500, then you would have done 2-3x better!”….alright sure, but let’s take a closer look at that claim.
Typically, when they make such a claim, they take ALL of their recommendations, and run the simulation, completely ignoring the realistic expectation that an investor will only be able to follow each and every single recommendation. Motley Fools releases a new recommendation every two weeks, if you’re an average investor, how could you possibly buy into each of their recommendations? Well, what happens if you miss a bunch of them? Well, from the mouths of the Motley Fool founders, 4/10 recommendations end up being losers.
Think about that, if 40% of the picks are losers, then you run a real risk of underperforming the market by simply not being able to get into every stock. Obviously, Motley Fools is banking on the idea that the 6/10 recommendations will be multi-baggers and will make up for the losers and more – which sure, is OK. But if you yourself are selecting from that group of 10, and only have the money for 5 stocks, then what happens if you actually picked the 4 losers, and now you have a portfolio of 4 losers and 1 winner.
This also ties into the backtesting results that Seeking Alpha has posted about their Quant, so let’s go into that now.
Digesting The Backtest Results for Seeking Alpha’s Quant
At first glance, that looks great, right? But what does it really take to replicate such results?
- You HAVE to buy EVERY “Very Bullish” recommendation
- You HAVE to make sure each investment is equal weight.
- You HAVE to make sure you rebalance EVERY single day.
- You HAVE to use a brokerage that charges $0 fees for commission (easier in 2021…. than it was back in 2012)
Today, three of those four criteria are not feasible for the everyday investor.
To further drive the point how it’s also impossible to be invested in all the “Very Bullish” recommendations:
Just for today, June 4, 2021, there were 376 stocks that fit the “Very Bullish” criteria. Are you really in a position to invest equally into those 376 stocks, and then rebalance all of them daily? Not to mention add in new stocks that receive the “Very Bullish” rating, or get rid of stocks that get downgraded from that rating?
I bet not.
But here is where things get a bit confusing. On this same page, that shows the results of their Quant system over the last 10 years, if you have the “Premium” plan, then you’ll see the following hyperlink on the page:
When you click on that link, it leads to the following screener settings:
So let’s recap what’s going on here. The backtest that we are shown is one that shows the “power” of the quant system, and that if you simply bought all the “Very Bullish” marked stocks over the last 10 years, and followed all the proper steps in terms of balancing, you would have been the market. But, Seeking Alpha doesn’t link you to the screener that strictly looks at the “Very Bullish” stocks. Instead, they link you to a screener that has the following parameters:
- Quant Rating is Bullish or better
- SA Author Rating is Bullish or better
- Wall St Rating is Bullish or better
That’s cool, but that not what the backtest was based on, so if anything we don’t have any out-of-sample data for how this screener is going to perform.
The reason I am bringing this up is to show you why the vast majority of the time when a service is pitching the “backtest” results of their service, the graphic is usually not even worth the space that it’s taking up on their server.
Now that we’ve taken a few jabs at Seeking Alpha, let’s see if there is added value from their Quant system. To better showcase the tool, I will be transparent with the stocks. If someone from SA is reading this post and has an issue with that transparency, contact me, and I will blur out the stocks.
Let’s start by examining Apple:
So pay attention to the right sidebar. With Seeking Alpha Premium, you do receive these quick grades for stocks that do help you quickly gauge the “rating” for the stock. At the same time, for the “Quant” rating, in the second table, you can see how the grades are broken down. Right now, Apple is getting dinged the most for “Value”.
How does the Quant system determine “Value”, I actually have no clue because they decided not to share that information. All I could find from this page is that they do not look at PE multiples, nor do they use the discounted-cash flow model.
We can dig further by clicking on “Value” under the “Factor Grades” table:
In my opinion, based on how the data is being shown, the “Value” factor in the Quant system relies on comparing the fundamentals to other companies in their industry. At a quick glance, you can come to the conclusion that Apple does seem to be trading richer compared to its sector.
On the flip side, let’s look at the “Profitability” factor since that seems to be Apple’s strong suit with the Quant system.
Without question, Apple’s margins are a strong suit for the company, and it definitely helps in receiving a 4.83 rating from the Quant system.
Granted, from a fundamental point of view, the Quant system is trying to sell us right now that Apple is trading a little too rich, and that does seem to be the case whether we compare Apple to the sector median, or to Apple’s past 5-year average.
Let’s look at some other data points that you are privy to with the Seeking Alpha Premium subscription.
SA does give us a page where we can lineup sector competitors of Apple on one page and compare the stats:
We can actually pick up some interesting pieces of information here. Notice how HPQ actually receives an A+ for “Value”, but a D for “Growth”. Well, we can also see that the Quant system had given HPQ a “Neutral” rating, which is good to see, but it means that the Quant system isn’t entirely focused on the current fundamentals.
A big issue with many tools that try to find “undervalued” companies is that they give you companies that might be trading for a low PE, but they’re trading down there usually due to poor expected future growth. These sorts of stocks can be referred to as “Value Traps”.
Well, by seeing that the Quant system definitely loves the “Value” behind HPQ, as well as the “Profitability”, but understands that the future growth is lacking, it crunches the numbers enough to say that it might not be that great of a pick.
Definitely an ouch on the growth there for HPQ.
We can go back to Apple, and see what other information we have access to under the Premium plan.
I personally do enjoy this section, which does quickly show us what the authors of SA think of the stock, as well as what Wall St thinks of the stock. Personally, when it comes to stock picking, I do want to read as many opinions as possible, especially from the bears.
We can dive a little deeper by going to each of those ratings separately:
As well as Wall St:
Alright, we’re going to have to move forward from here since I can continue posting screenshots for hours. But obviously, if you want to see the company’s actual financial statements, those are available on SA, as well as earning reports, SEC filings, etc.
“Very Bullish” Screener by the Quant System
We’re now going to look at the stocks recommended by the Quant system. This screener is basically the one that is recommended to only subscribers to be used. I will be sharing the top 10 stocks that the Quant system recommends as of right now. For most readers, by the time you are reading this post, there is a good chance that the list has changed, and the same opportunity is no longer there.
There you have it. I didn’t any of the filters, I simply clicked on the “Top Rated Stock” screener that is provided and suggested by Seeking Alpha.
One thing that should stick out is how all of these stocks are very strong grades from the Quant system across all the factors. What that means is that you will never truly see an actual growth stock as part of this screener. If we take a company such as LMND right now, which is losing money quarter after quarter, their grade for “Profitability”, and “Value” would be so low, that their overall Quant grade will be down in the dumps, meaning, it will never be suggested to you.
This is something to keep in mind when you look at what the screener suggests. It really tries to give you stocks that are the most well-rounded, which can mean that you will lose out on other opportunities.
One thing we haven’t mentioned is that Seeking Alpha updates the ratings for all the stocks on a daily basis.
Testing the Quant System
What better test could there be than just dropping $50k across the top 5 stocks currently recommended by the Quant system?
That’s actually what I did.
I had about $52k in a Robinhood account that wasn’t invested in anything, so I figured I can use that brokerage account to buy into the stocks and monitor the results.
All of these positions were purchased on June 4, 2021, and an equal amount of $10,000 was placed in each position.
I’ll post my cost basis for each:
- DAC: $60.93
- BGFV: $30.55
- FINV: $8.73
- MARA: $24.62
- BXC: $45.95
For reference to the major indexes, on this day:
- S&P 500: 4227
- Dow Jones: 34,750
- Nasdaq: 13,763
- Russell 2000: 2283
Now I do plan to hold these positions for a few months. I know that to investors, a few months sounds like a joke, but Seeking Alpha does pride itself on the idea that the Quant system can find you great opportunities right this moment that can be realized very soon. But, if the rating on the stocks changes drastically to the downside, then I would likely be cutting them for a loss.
I will be keeping you guys updated on these positions down below, so make sure to bookmark the page if you’re interested in future updates.
Just to recap, I have been a Seeking Alpha Premium member for less than a week. I do like all the different features that are available to me, and I personally do believe that their grading system and the way they display information is useful to any investor.
Personally, I still skeptical on how the Quant system will perform, specifically when it comes to their “Best Rated” stocks. There are some obvious flaws in what sort of stocks would be recommended, and what wouldn’t be recommended.
It’s actually almost the opposite of the approach that a platform such as Motley Fools takes. Motley wants you to buy hyper-growth stocks with no earnings, while the Quant System is pushing you only into stocks that are profitable, has sound valuations, and aren’t overpriced.
I do believe that coming up with your own determination of what factor grades you want to filter for would be pivotal for individual investors when it comes to choosing the sort of stocks you want to be recommended.
Either way, I hope you liked this review, and if you have any questions, make sure to leave them in the comments.
1-Year Update (June 9, 2022)
When I originally put together my review, it was on June 6, 2021; so just over one year from now! I always intended to make a follow-up much earlier, but never got the chance to. Over the months that followed, since I bought the above stocks, I did end up selling out of them. It wasn’t all at once, but at different times. But either way, I am going to do my best to showcase what the results were.
As a refresher, here were my purchases, and my cost basis:
- DAC: $60.93
- BGFV: $30.55
- FINV: $8.73
- MARA: $24.62
- BXC: $45.95
The first stock that I completely sold out of was MARA; at an average price of $29.92 on June 16, 2021. Yes, less than 2 weeks after I entered the trade. I see the quick profits, and I took them. +21.5%
The second stock that I completely sold out of was FINV, at an average price of $9.57 on June 21, 2021. Pocketing +9.6% on that trade. I believe I exited this one due to the Quant system downgrading the stock’s rating overnight.
The third stock that I exited was BXC, at an average price of $59.15 on August 9, 2021. This came out to a +28.70% return. By the way, BXC ended up hitting a high of $95 by the end of 2021….
The fourth stock that I exited was DAC, at an average price of $72.19 on August 19, 2021. This clocks in a return of +18.40%.
The final stock on the list was BGFV, and I sold out of it at $21.35 on August 19, 2021 as well. This time around, we ended up losing -30% on the trade!
So the BFGV loss was pretty big, but fortunately, we did place an equal amount of money into each trade. Either way, we ended up with an average +9.64% return on our capital. So on $50,000 invested, that is a gain of $4,820.
We ended up entering and exiting all the trades all within three months, so it is fair to say that most of these are “trades” than “investments”.
It’s only fair if we compare what S&P was trading at come August 19, 2021 as well, which was 4,445. Remember, it was at 4,227 when we started this experiment. So it did help us that we had the wind behind our back during these months.
Let’s also take a look at what the data currently shows for the “Quant” model:
Based on that data, we are told that their quant model has greatly outperformed the S&P 500 in 2022 as well, by a massive margin!
But here is the thing….I still stand by what I said before, it’s not possible to replicate these results.
I’ve been a Seeking Alpha Premium member for a year now, and I use their platform multiple times per day, and I do still take a look at the stocks recommended by their quant, but what I also notice is the constantly reshuffling. There really is no way to be truly invested in a stock. You can buy in one of the higher recommended stocks today and then be told the next day that you should sell it since it’s no longer a “strong” buy. Then guess what, the next day the stock once again appears as a strong buy!
And as I’ve also said before, you need to also have funds available to invest in recommendations, if you want to come close to replicating such results.
Remember my BGFV results from above? Where I lose 30%. What if I had placed all my funds in that trade, or 50%? I would have ended up underperforming the S&P 500 then. I was fortunate that I chose 5 stocks, and I placed an equal amount in all of them.
Should you get a premium membership?
Here is the thing, I don’t believe that relying on the stocks that the quant model feeds you will make you wealthy. The results cannot be replicated, point back. BUT, I do enjoy having full access to all the articles posted on SA, so paying for the membership makes sense. I will also say that when it comes to reviewing new stock opportunities, I will glance at the ratings that the quant model provides, such as it does a decent job in quickly telling you how those numbers compare to competitors or the industry average. So while I can’t use the system to blindly buy stocks, it does make me more efficient in conducting my own research.
So, if you’re looking to widen the tools at your disposal to try to pick up winners on the market, then yes, a SA Premium membership will help with that. If you are looking for an easy stock-picking tool to help you beat the market, then I wouldn’t suggest a membership for that reason.
If you have any other questions, make sure to drop it in the comments, thanks for reading!