The IQ List: Smart Stocks with Potential

Here are top scorers under Standard & Poor's "Investability Quotient" measure, which ranks stocks according to their potential for return

by Beth Piskora From Standard & Poor's Equity Research

What is your portfolio's IQ? That's not "intelligence quotient," but "Investability Quotient." Specifically, the IQ is a proprietary Standard & Poor's measure of investment desirability. The IQ serves as an indicator of potential medium- to long-term return and as a caution against downside risk.

Think of it as a metric of metrics. S&P's IQ combines models using proprietary analytical tools, technical measures, liquidity and volatility indicators, and quantitative analysis to come up with a total score. Under the IQ system, companies are scored on a scale of 1 to 250—similar to the standard measure of human intelligence—with higher numbers signaling stronger potential.

The IQ model combines four submodels:

• An S&P proprietary model based on STARS ranking, quality of earnings and dividend growth, and an outfit's credit rating;

• A proprietary, multifactor statistical model that includes valuation, profitability, risk, and momentum factors;

• A liquidity and volatility model that measures liquidity and downside risk; and

• A technical model that looks at six-month relative strength.

That's quite a challenging course for any stock, and we decided to add one final hurdle for this week's screen. We looked for stocks with S&P's highest investment ranking—those with 4 STARS (buy) or 5 STARS (strong buy) rankings—that also feature an IQ higher than 200.

When the screen was finished, 13 stocks were tapped to join this equity-investing version of Mensa:

Check out the BusinessWeek.com slide show to learn more about the 13 stocks our screen turned up.

Piskora is managing editor of U.S. Editorial Operations for Standard & Poor's .