# InvestWatch -- intro [InvestWatch](https://praa.ms) is a mobile and web app that analyses the risks and returns of 120,000+ stocks, bonds, and ETFs, similar to a professional CFA-level research analyst and risk manager. It takes seconds to analyse and understand an instrument's key investment factors. The methodology includes over 470 key metrics, updated daily. The key to InvestWatch’s design is that it shall take any user less than three seconds to research any asset. It is easy to understand the concepts of risk and return. Return is something that can drive the price up, while risk is something that can drag it down. Thus, in InvestWatch, the information is presented in a classic hand-watch format: return factors on the right, hours 1 to 6, in green, and risk factors on the left, hours 7 to 12, in red. In risk-return terms, investing is about finding instruments with more return than risk. In InvestWatch’s terms, investing is finding assets with more green on the right than red on the left. This is it. So simple. For stocks, return factors cover all fundamental investment paradigms: value investing (Valuation), medium-term price swing investing (Performance), prominent analyst following (Analyst view), investing in solid companies (Profitability), growth investing (Growth), and dividend seeking (Dividends). Although these are usually considered separate and even competing investing schools, all six are critical for understanding the return potential for any stock. Risk factors cover essential risk factors: credit risk (Default risk), market risk (Volatility and Stress-test), liquidity risk (Selling difficulty), country & infrastructure risks (Country risks), and many other risks (Other risks). Again, all six are critical to understanding the risk profile of a stock.

InvestWatch risk & return for stocks

For bonds, InvestWatch follows a similar logic. Valuation benchmarks the bond against the peers, i.e., the peers with similar risk profiles and denominated in the same currency. Performance measures the bond’s price performance against the peers considering its relative valuation. Market view compares the bond’s fair spread implied by the bonds with a similar risk profile and in the same currency to its existing spread. Profitability and Growth sections are identical to those for stocks, though here, these relate to both the issuer and the guarantor. The Coupons section deals with coupon payments and their characteristics. In terms of risks, these are very similar to the sections for stocks, except here, InvestWatch considers the risks of both the issuer and the guarantor, and the Other risks section includes more parameters (subordination and its degree, embedded options, etc.).

InvestWatch risk & return for bonds

# PRAAMS Ratio To make things even more simple, we designed a metric with superpowers. Using it, you can research any asset in 1 (yes, one) second. It is worth repeating it: one second. It is called the PRAAMS Ratio, and it is a powerful risk-return ratio. It shows how much return an asset offers per unit of risk. It takes one of 7 values: 1 is the lowest score, i.e., this asset has high overall risk and low overall return potential, and 7 is the highest score, i.e., overall return potential is high while the overall risk is low. It has not been designed to indicate whether you shall buy, hold, or sell an asset and shall not be considered as such. Overall risk and return potential scores are general, combining all critical risk and return factors. These may not be suitable for you, and, of course, the PRAAMS Ratio does not consider your personal risk tolerance, financial objectives and constraints, and investing style. The PRAAMS Ratio is an improved version of the Sharpe ratio (and many of its successors like the Sortino ratio, Treynor ratio, CALMAR ratio, Information ratio, and others). Sharpe ratio is a relation between an asset’s performance and risk measured by standard deviation. PRAAMS Ratio outperforms the Sharpe ratio: · The Sharpe ratio is backward-looking, while the PRAAMS Ratio is forward-looking as it uses much more data to offer good forecasting power; · The Sharpe ratio considers only market risk (standard deviation), while the PRAAMS Ratio covers all key risks, including market, credit and other risks as well, as all these may affect the instrument’s price; · The Sharpe ratio is not standardised, ranging from minus to plus infinity, and it may be challenging to use for comparison across assets or portfolios. PRAAMS Ratio is standardised, varying from 1 to 7, for every asset class, and it is easy to compare individual assets and portfolios; · The PRAAMS Ratio is designed with long-term investing in mind. It works best for investing horizons from one to five years, as confirmed by its numerous back-tests. # Return factors The highest score (7 of 7) = the highest relative return bucket The 1-7 scale is standard in InvestWatch, and all the metrics are measured on a 1-7 scale. The higher the score, the higher the metric. A high *return* score means a top *relative ranking* of this asset versus the peers, i.e. high return potential. A high *risk* score also means top *relative ranking*, i.e. high risk. A high return or risk score does not necessarily imply that the asset is good or bad. The methodologies have been designed, validated and calibrated to have the highest predictive power when all 12 factors are considered. So, choosing one or two might not have the same predictive power. # Valuation Here, we look at the asset’s valuation relative to its peers using classic multiples such as P/E, PEG, P/B, P/S, P/FCF and EV/EBITDA for corporates. These multiples are well-known and widely used thanks to their excellent predictive power. For the banks, we use a different set of metrics: classic P/E, PEG, and P/B multiples, as well as our know-how metrics, such as P/CR, P/RIBPT, and P/IBPT. P/CR is Price to Core Revenue (CR), similar to P/S for corporates. CR is calculated as Net interest income plus Net fee & commission income. P/IBPT is Price to Income Before Provisioning and Taxes (IBPT), similar to EV/EBITDA for corporates. IBPT is calculated as Core revenue minus Operating expenses plus Non-recurring income. IBPT measures operating profit but includes non-recurring items such as, for example, trading income, which may be heavily volatile. P/RIBPT is Price to Recurring Income Before Provisioning and Taxes (RIBPT), similar to P/FCF for corporates. RIBPT equals Core revenue minus Operating expenses. RIBPT measures the recurring operating profit of a bank, i.e. excluding inherently volatile sources of income. Also, both IBPT and RIBPT exclude provisioning, which is usually highly influenced by management decisions and rarely reflects the actual dynamics of the problem assets. We have been using these metrics for over a decade, and they have proven to have high predictive power for banks from both emerging and developed markets. The valuation score reflects how much this asset is under- or overvalued on the applicable multiples relative to its peers, including global, regional, country, sector, industry, and size peers. The lowest score (1 out of 7) means the asset’s multiples are significantly higher than various peers (‘greatly overvalued’). The highest score (7 of 7) implies that the asset’s multiples are markedly lower than peers (‘greatly undervalued’). For bonds, this section benchmarks the bond’s yield-to-next (YtN, combining yield-to-maturity, yield-to-call, and yield-to-put) against the YtNs of the bonds with similar overall risk profiles and denominated in the same currency. The bond with YtN materially above that of the relevant peers will receive the highest score (7 of 7) and be labelled as distinctly ‘cheap’. On the other hand, the bonds with the lowest YtN among the relevant peers will receive the lowest score (1 of 7) and be labelled as very ‘expensive’. # Performance This metric reflects the performance of the asset’s price relative to its relevant peers on different time scales (one week, one month, three months, and six months). Depending on the initial relative valuation standing, price changes can make the asset more or less ‘undervalued’ or ‘overvalued’. The lowest score (1 of 7) is assigned when an undervalued asset’s price falls while that of the peers increases, i.e., an undervalued asset becomes even more undervalued. The same low score is assigned when an overvalued asset rapidly becomes even more overvalued relative to its peers, which is typical for early-stage single-stock bubbles. On the contrary, the highest score (7 of 7) is when an undervalued asset increases in price faster than its peers, thus correcting its relative undervaluation and making its valuation ‘fair’. # Analyst view (stocks) Here, we collect publicly disclosed target prices on this asset provided by external analysts from investment banks and research houses and range them according to the distance between the current asset price and maximum, minimum, median, and average target prices, the number of covering analysts, and the dispersion of target prices. The low score is assigned to an asset with no or minimal number of covering analysts, very close or negative distance to maximum, median, and average target prices, or very distant or negative distance to the minimum target price, and very high dispersion of target prices, as this shows little agreement of views among the analysts. # Market view (bonds) Unlike stocks, which external analysts often cover, this is a rare case for bonds. So, for bonds, we compare the bond’s yield spread to its ‘fair’ spread. The bond’s spread is a hierarchy of z-spread, I-spread (interpolated for maturities) and G-spread (to the nearest benchmark curve maturity). The ‘fair’ spread is an implied ‘average’ spread (in the same hierarchy, estimated through standard spread-overall risk OLS/MLE regressions) by the relevant peers, i.e., the bonds with a similar overall risk profile and in the same currency. The bonds with the highest ‘excess spread’ receive the highest score (7 out of 7), while those with very ‘expensive’ receive the lowest score (1 out of 7). # Profitability This section provides information on crucial return metrics such as return on equity (RoAE, denoted as RoE in the software), return on assets (RoAA, or RoA), return on capital employed (RoACE, or RoCE) and return on invested capital (RoAIC, or RoIC). It also incorporates information on critical margins such as gross, EBITDA, and net margins. In addition to the relative ranking of the absolute value of these return and margin metrics (average weighted for the last several years), we rank assets in terms of the volatility of these metrics. Finally, we utilise an essential value-creation RoIC/WACC metric for corporate stocks. The lowest score (1 of 7) is assigned to an asset ranking among the lowest among its peers on return, margin and RoIC/WACC metrics and very high among its peers on the return and margin metrics volatility, considering both historical, current, and forecasted periods. The highest score of 7 out of 7 means very high (again, relative to the peers) values of margin, returns metrics, value-creation RoIC/WACC metric and low historical volatility of these metrics. # Growth The return metric summarises the relative ranking of the asset versus its peers in terms of revenue, EBITDA, FCF, and net income / EPS growth rates. It also considers the presence and the severeness of key metrics’ seasonality, the presence and persistence of growth momentum, growth rates volatility, and the availability of quarterly financials. For the financial institutions, we use core revenue (the sum of net interest income and net fee and commission income), IBPT (income before provisioning and taxes), and RIBPT (recurring income before provisioning and taxes), which better reflect their business model. The lowest score of 1 of 7 reflects very low relative ranking versus peers on these metrics, severe seasonality, annual-only financials, and the absence of growth momentum of any key financials. # Dividends (stocks) and Coupons (bonds) This section incorporates factual information on dividend-related metrics such as the history of dividend payments, stability and growth of dividend / coupon payments, dividend pay-out coverage and its long-term sustainability, dividend yields for short and more extended periods, and frequency of dividend / coupon payments. The asset with the highest score (7 of 7) ranks very high relative to its peers and has a long and stable history of dividend / coupon payments, pays them regularly and frequently (e.g., quarterly), the dividends / coupons have been growing over time, earnings and cash flow well cover dividend pay-out, and the dividend yield / coupon rate / current yield has been and is expected to stay very high. The lowest score (1 of 7) means a low relative ranking for dividend metrics and is usually assigned to companies not paying dividends / coupons. # Risk factors The highest score (7 of 7) = the highest relative risk bucket The 1-7 scale is standard in InvestWatch, and all the metrics are measured on a 1-7 scale. The higher the score, the higher the metric. A high *return* score means a top *relative ranking* of this asset versus the peers, i.e. high return potential. A high *risk* score also means top *relative ranking*, i.e. high risk. A high return or risk score does not necessarily imply that the asset is good or bad. The methodologies have been designed, validated and calibrated to have the highest predictive power when all 12 factors are considered. So, choosing one or two might not have the same predictive power. # Default risk This section provides information on the asset’s relative ranking regarding critical financial metrics and ratios measuring credit risk and the probability of default. InvestWatch considers the business size, industry position, growth rate and stability of its key financials, including profitability and returns metrics, the quality of working capital management, key corporate governance metrics, strength cash flow generation across various cash flow definitions, the level and proportions of short- and long-term indebtedness, debt and interest servicing capacity, debt coverage and other credit metrics. The banks are ranked in terms of a more applicable set of metrics and ratios: balance sheet composition and funding structure including disproportions, asset-liability mismatches and funding stability, quality of income (proportion and relative dynamics of core and non-core incomes sources such as net interest income, net fee & commission income, and non-recurring income), capitalisation (CET1 and other regulatory metrics, capitalisation, leverage, and debt-to-equity ratios), asset quality (non-performing loan ratios, reserve & overall provisioning coverage, dead-bank ratio and the share and composition of securities portfolio), key corporate governance metrics, earnings (key return and margin ratios, cost-to-income and cost-to-asset ratios, net interest spread and net interest margin metrics), and liquidity (the share of highly and quasi-liquid assets, deposit coverage, funding stability and its coverage, loan-to-deposit ratios). Although we share the same set of metrics used by the rating agencies, InvestWatch does not pretend to be a rating agency due to the narrower variety and granularity of the employed metrics and the absence of access to insider company information. The highest score (7 of 7) on the default risk / solvency metric means that the asset ranks in the worst bucket in terms of these credit risk metrics relative to its peers, i.e., it has a very high credit risk. For bonds, the credit quality of both issuer and guarantor are considered. Also, to arrive at an instrument’s credit risk, we adjust the presence and degree of the debt subordination (e.g., junior subordination for perpetual bonds, contingent convertibles, or other hybrid Tier 1 instruments versus senior subordination of classic Tier 2 debt). # Volatility (market risk under normal conditions) This metric summarises key market risk indicators such as VaR and CVaR at various degrees of confidence and time horizons, price return volatility, stress risk and jumps, intraday price volatility at different percentiles, as well as stability of trading volumes, adjusted for market-cap and sector effects and trading history length. An asset with the highest score of 7 ranks in the top risk bucket relative to its peers. It means very high price volatility, both historical and intraday, the fat left tail of return distribution, significantly above-average probability of sudden price falls and volatile liquidity. For bonds, we additionally consider adjustments for credit score ranking and liquidity, as bonds with lower credit scores and poorer liquidity tend to exhibit higher volatility, other things being equal. # Stress-test (market risk under stress conditions) This metric is similar to the previous one, except it focuses more on the stress-condition market risk metrics such as stress risk and CVaR and stability of trading volumes, again adjusted for market-cap and sector effects and trading history length. The highest score of 7 (i.e., very high stress-market risk relative to peers) means the abnormally fat left tail of return distribution and significantly above-average probability of sudden price falls. For bonds, the same credit score and liquidity adjustments are applied, though a harsher set of scenarios is used. # Selling difficulty / Liquidity This section provides information on the asset liquidity, i.e., how easy and quickly an investor can sell the position in the asset for cash at a price very close to that currently prevailing in the market, at any time and in any market condition. The metrics used for ranking are absolute and relative trading volumes measured at different percentiles of the historical distribution, absolute and relative volatility of trading volumes, numerical effect of stress market conditions on liquidity and stability of trading volumes. The lowest score of 1 out of 7 means that the asset ranks in the lowest liquidity risk bucket relative to its peers, i.e., an investor is very likely to be able to quickly sell a sizeable position in the asset almost immediately, without any material effect on the prevailing market price even both under normal and stress market conditions. For bonds, we tend to rely more on metrics such as bid-ask spreads, price changes, and amount outstanding due to OTC nature and much poorer reporting. # Country risks This section summarises information on the asset’s relative standing regarding country, infrastructure, legal, institutional and compliance risks. Here we consider such metrics as the country’s investor framework, how the asset is traded (OTC vs exchange-traded, the presence and quality of the CCP and CSD, the relative strength of pre-trade and post-trade infrastructure such as, for example, clearing houses and depositaries, centralised or not, etc.), the presence of compliance or legal risks when trading or safekeeping the asset or exercising of the rights connected to the asset (e.g., the right to rightfully and freely own the asset and receive cash flows in the stated currency, which could be impaired by sanctions or capital controls, for example), and general institutional and legal environment and standard business practices to protect the rights of the investor who owns this asset (e.g., voting, dilution, information disclosure). # Other risks This section summarises the effects of risk factors specific to this particular asset, which may have critical effects but may be unobvious to investors. For example, it may be in-built leverage, a going-concern write-off clause for junior subordinated debt, or embedded options in a bond or structured note. The lowest score (1 of 7), i.e., ranking in the lowest relative risk bucket, means that the asset is known to have no non-obvious risk factors stipulated in its documentation or associated with its particular structure, to the best of our knowledge.