Bill-
You're correct -- Take Stock is based on an evaluation of the key fundamentals that best represent a company's management's ability to operate a growing and profitable enterprise. The Quality Index is meant to help you find superior businesses; the premise is that these kinds of companies will be more likely to perform well (fundamentally) in the future since they have done so in the past.
Take Stock looks at the company's history in these areas, weighting the recent results more heavily:
- The strength and consistency of past EPS growth.
- The stability of the annual pre-tax profit margins.
For users of our Toolkit 6 software program (or any of BetterInvesting's SSG software), these companies will past muster in Section 1 (the Visual Analysis of past growth) and Section 2A (the Quality indicator of the pre-tax profit margin trend).
There are certainly other indicators and other ways of rating companies for "Quality," but the Take Stock approach takes a streamlined approach and views what we consider the two most important criteria. Companies that are well-managed in these areas are likely to be good all-around businesses.
Once you've found a high-quality, well-managed business and are convinced that the drivers are in place to assure continued growth, the next step is to determine what an appropriate valuation is for the company. Many of the Take Stock's highest-ranked quality companies may well be over-valued at their current prices.
I can't speak definitively as to how the MSN StockScouter and StockGrader tools work. I do know that StockScouter looks at a company's technical and fundamental aspects and makes a statistical prediction about the stock's future performance. StockGrader also examines fundamentals but brings in valuation metrics as well.
There are many different methodologies for analyzing stocks, and investors have widely-varying timeframes and risk tolerances. The Take Stock approach is based on identifying candidates for your further review, so that you can then best determine which stocks best fit your needs and preferences -- do you prefer smaller, more aggressively-growing companies, or is a dividend yield more important to you? And so on....
The purely-quantitative approach of StockScouter and StockGrader is less likely to be suitable for a buy-and-hold approach, since they require you to adhere to all changes in their ratings when making buy and sell decisions. In my view, a quant approach works less well when investors "cherry pick" the results, since that introduces personal biases that affect the overall performance that the quants claim for their methodology. You should either buy the methodology -- that is, buy all top-rated companies, and sell when the rating declines -- or buy none of them.
Doug