Five Part Criteria for Finding Elite Stocks

[MachineGhost]

Why is this section always dead?  Doesn't anyone trade stocks for a living or side-income?

Anyway, the criteria below is the best I've ever seen to consolidate a heck of a lot of fundamental analysis into five simple metrics while still hitting all of the critical spots for selecting elite stocks.  You can find all of these metrics at Yahoo under Cash Flow Statement, Balance Sheet or Key Statistics.  And this comes from Stansberry.

Superior Brand/Products/Regulatory Capture: Total Operating Cash Flow / Total Revenues > 20%

Capital Efficiency: (Dividends Paid + Sale Purchase of Stock) / Capital Expenditures > 1

Economic Moat: Net Income Applicable to Common Shares / ( Short/Current Long Term Debt + Long Term Debt + Total Stockholder Equity ) > 20%

Business Quality: Net Income Applicable to Common Shares / Net Tangible Assets > 20%

Stock Valuation: EV/EBITDA (or EV/FCF < 10 if you get the latter at Morningstar)

By way of example, Apple is currently 32%, 3.4, 29%, 23%, 8.1 respectively.  Obviously, the last criteria is the most important since what you pay for a stock determines your ultimate return (you would want to tighten your stop or exit when it is overvalued, i.e. EV/EBITDA > 20).

[dualstow]

Why is this section always dead?  Doesn't anyone trade stocks for a living or side-income?

Side income, but not from stock sale profits. I get paid a flat fee to mechanically trade stocks according to a stock newsletter for an older gentleman who doesn't want to do it himself. He is not interested in indexing.

[MachineGhost]

Side income, but not from stock sale profits. I get paid a flat fee to mechanically trade stocks according to a stock newsletter for an older gentleman who doesn't want to do it himself. He is not interested in indexing.

Fascinating.  What stock newsletter?

[dragoncar]

Why is this section always dead?  Doesn't anyone trade stocks for a living or side-income?

Side income, but not from stock sale profits. I get paid a flat fee to mechanically trade stocks according to a stock newsletter for an older gentleman who doesn't want to do it himself. He is not interested in indexing.

Sounds like a trap

[D1984]

Why is this section always dead?  Doesn't anyone trade stocks for a living or side-income?

Anyway, the criteria below is the best I've ever seen to consolidate a heck of a lot of fundamental analysis into five simple metrics while still hitting all of the critical spots for selecting elite stocks.  You can find all of these metrics at Yahoo under Cash Flow Statement, Balance Sheet or Key Statistics.  And this comes from Stansberry.

Superior Brand/Products/Regulatory Capture: Total Operating Cash Flow / Total Revenues > 20%

Capital Efficiency: (Dividends Paid + Sale Purchase of Stock) / Capital Expenditures > 1

Economic Moat: Net Income Applicable to Common Shares / ( Short/Current Long Term Debt + Long Term Debt + Total Stockholder Equity ) > 20%

Business Quality: Net Income Applicable to Common Shares / Net Tangible Assets > 20%

Stock Valuation: EV/EBITDA (or EV/FCF < 10 if you get the latter at Morningstar)

By way of example, Apple is currently 32%, 3.4, 29%, 23%, 8.1 respectively.  Obviously, the last criteria is the most important since what you pay for a stock determines your ultimate return (you would want to tighten your stop or exit when it is overvalued, i.e. EV/EBITDA > 20).

MG,

Just curious...have you ever done a backtest on an equal weighted (and regularly rebalanced...like every month or every quarter or twice a year) portfolio of US stocks that meet all of the above criteria? I would imagine it could be accomplished in something like Portfolio123; they have data for criteria all the way back to 1-1-1999; they don't go back any farther than that because that's apparently as far as "100% guaranteed to be non-survivorship" biased Compustat data goes (or at least as far as it went when Portfolio123 started). I would be intrigued to see the results...especially how it did in the 2000-02 and 2008-09 bear markets.

[MachineGhost]

Just curious...have you ever done a backtest on an equal weighted (and regularly rebalanced...like every month or every quarter or twice a year) portfolio of US stocks that meet all of the above criteria? I would imagine it could be accomplished in something like Portfolio123; they have data for criteria all the way back to 1-1-1999; they don't go back any farther than that because that's apparently as far as "100% guaranteed to be non-survivorship" biased Compustat data goes (or at least as far as it went when Portfolio123 started). I would be intrigued to see the results...especially how it did in the 2000-02 and 2008-09 bear markets.

Nope, but that is the place to do it.  It's not gonna do much better than the market, though.  Everything gets dumped out with the bathwater when people panic.

I think the main advantage of elite stocks like these is you can safely write put options on them which is sort of like a dividend growth strategy without relying on the company to always pay and grow a dividend.

[D1984]

Just curious...have you ever done a backtest on an equal weighted (and regularly rebalanced...like every month or every quarter or twice a year) portfolio of US stocks that meet all of the above criteria? I would imagine it could be accomplished in something like Portfolio123; they have data for criteria all the way back to 1-1-1999; they don't go back any farther than that because that's apparently as far as "100% guaranteed to be non-survivorship" biased Compustat data goes (or at least as far as it went when Portfolio123 started). I would be intrigued to see the results...especially how it did in the 2000-02 and 2008-09 bear markets.

Nope, but that is the place to do it.  It's not gonna do much better than the market, though.  Everything gets dumped out with the bathwater when people panic.

How are you 100% sure on this? If you look at indexes like the Morningstar Wide Moat Index (the index underlying the ETF MOAT) and the Morningstar Dividend Focus Index (which in addition to dividend yield also bases the stocks it chooses on such criteria as risk of dividend cut/sustainability of earnings/distance to default and on having a goods economic moat) underlying HDV, they both did better than the S&P 500 during the 2007-09 bear market (in fact had HDV exited back then it would have only lost around 35% from the 2007 high to the 2009 low) and the autumn 2011 mini-crash. GMO Quality was similar; from mid-October 2007 to the bottom in March 2009 it lost around 39% when the S&P 500 TR lost about 55%. Neither of these indices existed back in 2000-02; nor did GMO Quality; but any index that chose stocks based on such criteria as having an economic moat and on such criteria as actually having ANY cash flow or net income (to say nothing of having good cash flow and net income valuation based on the criteria you mentioned) would have pretty much excluded upwards of 95% of the dotcom and networking bubble stocks (most of which actually had no P/Es because they had no earnings to speak of...and those that did have earnings were trading at 90+ P/Es and similarly high P/FCF and P/NEV) and thus did OK from 2000-2002.

If I ever upgrade my P123 subscription (I'm only a free member right now) I'll test it and see how it goes...would your recommended quarterly rebalancing or more/less frequently (some of the custom Ports in P123 rebalance every week or two but those are ones based on technicals and not on fundamentals IIRC)?

[MachineGhost]

How are you 100% sure on this? If you look at indexes like the Morningstar Wide Moat Index (the index underlying the ETF MOAT) and the Morningstar Dividend Focus Index (which in addition to dividend yield also bases the stocks it chooses on such criteria as risk of dividend cut/sustainability of earnings/distance to default and on having a goods economic moat) underlying HDV, they both did better than the S&P 500 during the 2007-09 bear market (in fact had HDV exited back then it would have only lost around 35% from the 2007 high to the 2009 low) and the autumn 2011 mini-crash. GMO Quality was similar; from mid-October 2007 to the bottom in March 2009 it lost around 39% when the S&P 500 TR lost about 55%. Neither of these indices existed back in 2000-02; nor did GMO Quality; but any index that chose stocks based on such criteria as having an economic moat and on such criteria as actually having ANY cash flow or net income (to say nothing of having good cash flow and net income valuation based on the criteria you mentioned) would have pretty much excluded upwards of 95% of the dotcom and networking bubble stocks (most of which actually had no P/Es because they had no earnings to speak of...and those that did have earnings were trading at 90+ P/Es and similarly high P/FCF and P/NEV) and thus did OK from 2000-2002.

If I ever upgrade my P123 subscription (I'm only a free member right now) I'll test it and see how it goes...would your recommended quarterly rebalancing or more/less frequently (some of the custom Ports in P123 rebalance every week or two but those are ones based on technicals and not on fundamentals IIRC)?

I'm 99% sure.  I've done enough backtests of varying stripes with TA and/or FA to know you cannot beat trend following when it comes to mitigating downside losses.  If everyone thought that elite companies were "safe", then stalwarts like Coke and Walmart would never ever sell for under $10 and Buffett wouldn't have his long-term track record.  So in a weird way, its very good that the majority of investors are emotional fruitcakes.

I think monthly should be a maximum for rebalancing, but quarterly makes more sense for FA given how infrequent it is updated.

Too bad Portfolio123 is really expensive now to do any realistic backtesting.  You can try http://keelix.com/backtester/ which uses CompuStat via AAII Stock Pro Investor service or http://backtest.org/ which uses ValueLine.  There's also https://www.quantopian.com/ but I don't know if they offer FA.

If you do anything, please share your results in this here thread.

[frommi]

Others have done these tests. Check http://greenbackd.com/2015/04/07/is-sim ... c-formula/
The most important criteria is a low EV/EBITDA, quality adds peace of mind but not a lot to returns.

I would recommend reading Quantitative Value from Tobias Carlyle: http://www.amazon.com/Quantitative-Valu ... tive+value.

They have set up an ETF that does what they did in the book, QVAL. So far it has worked, its up 6% vs. 3% on the S&P.

[MachineGhost]

I would recommend reading Quantitative Value from Tobias Carlyle: http://www.amazon.com/Quantitative-Valu ... tive+value.

I have that book but have yet to read it!  It kind of lost its thunder when they came out with that ETF.  Why bother doing all the work if they'll do it for you?