Conviction is more of a qualitative, not quantitative, calculation based on the depth of feeling you have in a company’s ability to achieve its growth potential and succeed as an investment over the long term (3-5 years or longer).
Within a central database (Fool IQ), Fool analysts individually are asked to build portfolios composed of the stocks they cover or in which they are interested, and give a ranking weight to each company for their depth of feeling, based on their analysis of earnings, competitive advantage, strength of management, and gut instinct for future growth potential. These weights represent each analyst’s individual conviction, from their highest-conviction or favorite ideas to the ones they feel less strongly about to negative-conviction ideas, or companies they feel do not have much upside.
This data is passed into an aggregated into a FoolHQ-wide list, with additional weight given to Fool analysts whose previous convictions has proven accurate in the past, among other factors such as experience, tenure, etc. The more accurate an analyst’s record is, the more weight is given to their convictions. If you thought this sounds a lot like how CAPs works, I expect that was the genesis of the idea for Conviction.
The list of all companies for which a conviction rating has been determined is separated into high, positive, neutral, and negative groups, with high being ideas are analysts most confident in, positive representing strong confidence, and neutral representing ideas they probably would not buy today, and negative being companies they would not invest in at all given current factors. These internal conviction rankings are generated daily to incorporate the latest analyst conviction weighting, updated at their discretion.
It is important to understand that conviction is not made in the context of any premium service - there is no SA Conviction or RB Conviction, though it can be used by any of the services - and the internal list of companies receiving rankings could include companies not currently or never recommended by any premium service. And while it can serve as insight into the collective qualitative thinking about a company from your Foolish analysts, it should only be a factor used by a Fool as they determine their own level of conviction in a company before making individual investment decisions.
Fuskie
Who notes at its core, the conviction rating is based on how an analyst feels about a company’s long term (3-5 years or longer) business growth potential and not based directly on a mathematical metric or model derived from market, financial or analytical performance…
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