Understanding the Strategyland 7-Factor Model

Overview of the Model

The Strategyland 7-Factor Model is a quantitative equity screening framework that ranks stocks by assigning composite scores across seven independent dimensions of financial health and market behaviour. Each dimension captures a distinct aspect of a company's investment profile, and together they provide a holistic assessment that no single metric could achieve.

The seven factors are: Liquidity, Valuation, Profitability, Solvency, Asset Efficiency, Market Trading, and Technical. Each factor contains multiple sub-metrics drawn from company financial statements, market data, and price history. Stocks are scored relative to their peers, and the weighted composite determines the final ranking.

Factor 1: Liquidity

Liquidity measures how easily a stock can be bought or sold in the market without significantly moving its price. This factor is critical for practical investability - a stock may appear attractive on fundamental metrics but prove impossible to trade efficiently if daily volumes are thin.

Our liquidity score incorporates several dimensions: average daily trading volume over multiple time horizons, bid-ask spread data, turnover ratio (volume relative to shares outstanding), and market capitalisation as a proxy for institutional market-making coverage.

Stocks with higher liquidity scores are easier to enter and exit, face lower transaction costs, and tend to have more reliable price discovery. We weight liquidity as the default 15% of the composite because it acts as a practical filter - even the most fundamentally sound company is a poor investment if you cannot trade it efficiently.

Factor 2: Valuation

The valuation factor identifies stocks trading at attractive prices relative to their fundamental value. Decades of academic research confirm that cheap stocks (measured by metrics like price-to-earnings, price-to-book, or free cash flow yield) tend to outperform expensive stocks over long horizons.

Our valuation composite uses multiple metrics to avoid the pitfalls of relying on any single ratio. Price-to-earnings captures profitability-adjusted cheapness. Price-to-book measures asset-based value. Enterprise value to EBITDA provides a capital-structure-neutral comparison. Free cash flow yield measures the actual cash return shareholders are receiving relative to the market price.

By combining these signals, the model identifies companies where the market price appears to undervalue the underlying business economics. The default weighting of 20% reflects the strong historical evidence for the value premium while acknowledging that value can underperform for extended periods.

Factor 3: Profitability

Profitability measures how efficiently a company converts revenue into profit. Academic research by Robert Novy-Marx and others has demonstrated that profitable firms generate higher stock returns than unprofitable ones, independent of their valuation.

Our profitability score examines multiple layers of the income statement: gross margin (measuring pricing power and cost structure), operating margin (incorporating overhead efficiency), net margin (after financing and tax), return on equity (profit relative to shareholder capital), and return on assets (profit relative to total resources deployed).

This multi-metric approach captures companies with durable competitive advantages - those earning consistently high returns on invested capital. The 15% default weighting reflects profitability's proven predictive power while maintaining balance with other factors.

Factor 4: Solvency

Solvency assesses a company's financial stability and ability to meet long-term obligations. Companies with excessive debt face amplified downside risk during economic downturns - a factor that becomes especially important during rising interest rate environments or periods of financial stress.

Our solvency composite examines the balance sheet from multiple angles: debt-to-equity ratio, interest coverage (EBIT relative to interest expense), current ratio (short-term liquidity), net debt to EBITDA (leverage relative to earnings power), and the Altman Z-Score which combines multiple balance sheet metrics into a single distress probability estimate.

The default 25% weighting - the highest of all seven factors - reflects our conviction that financial stability is the foundation of sustainable investment returns. Avoiding companies at risk of financial distress eliminates the most catastrophic outcomes from a portfolio.

Factor 5: Asset Efficiency

Asset efficiency measures how productively a company uses its assets to generate revenue and returns. Two companies may report similar profits, but the one achieving those profits with fewer assets deployed is operating more efficiently and typically has greater capacity for growth without dilutive capital raising.

Key metrics include asset turnover (revenue divided by total assets), inventory turnover (for manufacturing and retail businesses), receivables turnover (measuring collection efficiency), and return on invested capital (ROIC) which captures the overall productivity of all capital employed in the business.

Companies scoring highly on asset efficiency tend to have scalable business models, strong operational management, and capital-light growth potential. The 10% default weighting provides meaningful differentiation without over-concentrating in asset-light business models that may carry other risks.

Factor 6: Market Trading

The market trading factor analyses how a stock behaves in the secondary market - its volume dynamics, volatility characteristics, and trading patterns. This factor bridges fundamental analysis with market microstructure, capturing information about institutional investor behaviour and market sentiment.

Sub-metrics include relative volume (current volume compared to historical averages), volatility percentile (how volatile the stock is relative to peers and its own history), beta (sensitivity to broad market movements), and short interest data where available. Rising relative volume often signals increasing institutional attention, while declining volatility can indicate an approaching inflection point.

The 10% default weight provides exposure to these market-derived signals without letting short-term trading noise overwhelm the fundamental factors that drive long-term returns.

Factor 7: Technical

The technical factor captures price-based signals including trend strength, momentum, and mean-reversion characteristics. While pure technical analysis is often dismissed by fundamental investors, academic research consistently demonstrates that price momentum contains genuine predictive information about future returns.

Our technical composite includes relative strength (performance compared to the broader market over 3, 6, and 12 month windows), moving average signals (price position relative to key moving averages), and trend consistency measures. These metrics identify stocks in sustained uptrends where fundamental improvements are being reflected in price action.

The conservative 5% default weight reflects our philosophy that technicals should confirm fundamental attractiveness rather than drive the screening process. However, investors with shorter time horizons may increase this weighting to capture momentum-driven opportunities.

How Scores Combine

Each stock receives a percentile score (0-100) within each factor, based on its ranking among all stocks in the coverage universe. A score of 95 in profitability means the company is more profitable than 95% of its peers.

The composite score is calculated as the weighted average of all seven factor scores, using the investor-customisable weights that sum to 100%. The final ranking orders all stocks from highest to lowest composite score.

This approach has several advantages: it is transparent (every score is interpretable), customisable (investors can tilt toward factors they believe are most relevant), and robust (no single metric dominates the ranking).

Customisation and Economic Regime Awareness

Different economic environments favour different factor exposures. During inflationary periods, cash-rich companies with low debt (high liquidity and solvency scores) tend to outperform. During recovery phases, efficient companies with improving profitability lead markets higher.

Our Economic Trends presets automatically adjust factor weights to match four common macroeconomic regimes: High Inflation, Falling Inflation, Rising Interest Rates, and Stagnation. These presets encode the consensus view of which company characteristics provide resilience or opportunity in each environment.

Investors can also save custom weight configurations for different strategies - aggressive growth (high profitability and technical weight), defensive income (high solvency and liquidity weight), or contrarian value (high valuation weight with reduced momentum).

Data Sources and Update Frequency

Factor scores are derived from the most recent available financial data sourced from LSEG (London Stock Exchange Group) data feeds. Balance sheet and income statement data updates quarterly with company reporting cycles, while market-based metrics (price, volume, volatility) update with each data refresh.

Our current coverage includes 100 UK equities spanning FTSE 100 and FTSE 250 constituents across all major sectors. We are expanding coverage to US (S&P 500 and Nasdaq), European (Euro Stoxx 600), and Chinese (CSI 300) markets in upcoming releases.