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I have been looking into the sponsorship rating. Looking to understand what it is and how it could be used in any analysis of a stock. It is one of the criteria available in the screen.
For those of you who don’t know what it is, IBD Describes this rating as a “Unique IBD rating that helps investors know if a company's stock is owned by the better performing mutual funds and if more mutual funds have bought the stock recently.” The sponsorship rating uses the funds 3-year performance rating to identify better performing funds.
It can be found in the IBD Big Cap 20 table (not in the individual stock chart box), Daily Stock Analysis (when it is published), and in MarketSmith. If you are not a MarketSmith subscriber, you don’t really see it anywhere – except for some hit or miss on the Big Cap and DSA.
It is a strange rating. 43% of the stocks in IBDs database (2999 equities) do not have a rating. I looked at the equities that had no rating and it turns out, that there isn’t much a value in that group. For those curious as to the breakdown:
Total Equities with no sponsorship rating
Were low priced, thinly traded or had No of Funds <=100
Possible Institutional quality stocks, some were IPOs with little history or ADRs with N/A for ownership data – nothing of real value.
I looked at the distribution of the sponsorship rating of the IBD 50 and compared it to the IBD database. In general the IBD 50 contained a higher percentage of C and D sponsorship rated stocks and far fewer E and Blank sponsorship rated stocks (no E’s and 1 blank).
It also behaves poorly during bear markets. It incorporates IBD’s performance rating of Mutual funds, which looks at its past 36-weeks. During Bear markets, where the 36 month performance of growth stocks is ugly, few stocks can get a high-sponsorship rating. For example on August 2, 2009, there were just over 100 equities in the IBD database with a sponsorship rating of A or B. That makes sense as the mutual funds are rated based on their performance for the past 36-months (from August 3, 2006 to August 3, 2009, in this case). During that period the NASDAQ was down 5.1%. As of Oct 25, 2011, there were 1805 stocks with a sponsorship of A or B – the 36-mo performance of the NASDAQ is 69.9%. It would seem that its rating is more related to the market than the actions of institutions.
Finally, a search of “Sponsorship Rating” on Investors.com, gives me nothing for the past 2 years except for some references in the forums - no reference in any IBD articles. I found only 14 articles that referenced it between 2003 and 2009, but none were really useful. I did find it described in the IBD University but it appears to be outdated as it describes it being available in several of IBDs tables, including the weekly review and the IBD Timesaver tables, which it hasn’t been for a while. It is also listed as one of the key points for evaluating Institutional Sponsorship. So anybody new to IBD would be introduced to it, but can’t find it outside of MarketSmith, except for the odd reference to it.
Screening out those stocks with a blank or E sponsorship rating will exclude many poorer quality stocks, but any of the other criteria would do that and better. In general, none of the stocks, I watch have a blank or E sponsorship rating anyways.
It makes me wonder why it is even there. Does anybody use this rating? If so, how do you use it? As it is mainly a service to MarketSmith subscribers – I thought you would be the ones I asked. For those of you who don't use it - hopefully I have convinced you not to start :-) ...
I didn't want to make it sound all bad. The following is what O'Neil had to say about it in a 2001 Interview.
Q: How can I tell if my stock is sponsored by institutional investors?
O’Neil: Investor’s Business Daily has yet another proprietary gauge called Sponsorship Rating, published in the stock tables every Tuesday. Each stock’s sponsorship is rated on an easy scale from A to E. An A or B rating means better performing funds own the stock and/or the number of funds owning the stock has been increasing in recent quarters.
I did create a screen that looked at stocks with a Sponsorship Rating of A or B. It did find a number of quality stocks that I am watching, including: HXL, RAX, ULTA, SWI, ABV, ATHN, UA, NSR, BJRI & HIBB; 32 in total as of this post. I did include some other basic institutional sponsorship indicators, but on its own, it did include a lot of junk. This is a great screen to get confirmation of leaders.
The name of the shared screen is "I in CAN SLIM - Sponsorship".
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