Why does a stock get an "A" grade when the valuation shows it is overvalued and vice versa?


Quick answer: The Action Score rating is not based on the valuation models.

Look at this stock PGNT.
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The valuation shows that the stock price is WAAAY above the fair value.

However, the Action Score shows that it is one of the top stocks.


What?!?


Here's the key point to understand.


The fair value chart is based on the default DCF calculations.


Just because the stock is overvalued in the fair value chart, it does not mean it should be an F.
The Action Score rating is not based on the valuation models.


If a stock is not suited to a DCF, it will show the stock to be off and adjustments are needed. That is why the Action Score is there as "the wise" elder.

For PGNT, the valuation is off, but the Action Score is excellent.


From this, I can assume a couple of things.

  • PGNT is not suited to a DCF
  • or PGNT is losing money on the income statement (because the default DCF selection is net income)
  • but PGNT must be cheap and have a lot of P/FCF because that's what the Value Scores are based on

Digging deeper, a couple of extra basic insights I get by pausing to think through what these two sources are telling me.

  • PGNT could be misunderstood by the market judging by the difference between the DCF and other OSV Rating numbers.
  • Most A & B grade stocks have a Piotroski score of 8 or 9. Does the high Piotroski score properly reflect the fundamentals of the business?

Try practicing with some other stocks and scenarios you come across and see how it helps you to see a bigger picture first before zooming in to the details.