Porter's Journal

The Modified Munger Screen, European Edition

Posted onAuthorPorter & Co.

Hunting For Value Across The Pond

In today’s Saturday Stock Screen, we’re taking a look at potential opportunities in European stocks. 

Each week, we apply our brainpower to uncover the most compelling, highest-upside investment ideas. And with this complimentary issue of the Daily Journal, we draw the curtain back to show you how we do it.

An important tool in our analytical toolbox is our stock screens, in which apply a list of criteria – relating to different financial, accounting, and performance parameters – to sift through the 3,000+ publicly traded stocks on U.S. markets. That’s how we are able to identify the  tiny fraction of the universe of U.S.-listed stocks that offer the best opportunities for making money.

We often use the results from these screens as a starting point for more in-depth analysis for possible inclusion in The Big Secret On Wall Street portfolio.

Given our bullish view on international stocks, as detailed in our latest issue of The Big Secret, in this issue we’re applying one of our favorite stock screens, the Modified Munger, to stocks listed in Europe.  

For Partner Pass members, we’ll sometimes highlight an opportunity from the screen, or elsewhere, that appears particularly compelling (see below) – not as an official recommendation, but as a stock that’s on our radar.

Questions about our Saturday Stock Screen?… drop us an email at [email protected].

This screen is inspired by the late Charlie Munger, Warren Buffett’s partner, who once described a dead-simple strategy for beating the market:

If all you ever did was buy high-quality stocks on the 200-week moving average, you would beat the S&P 500 by a large margin over time. The problem is, few human beings have that kind of discipline.” 

Our Modified Munger screen applies the following criteria, based on this original idea: 

  1. Return on equity exceeding 20% as a filter for high-quality businesses
  2. Insider purchases within the last three months, to screen for businesses where insiders see enough value in their own shares to make an open market purchase
  3. Market capitalization over $1 billion to exclude micro-cap, low-liquidity stocks
  4. Stocks trading below the 200-week moving average, as well as those trading up to 5% above the 200-week moving average (this extra 5% lets us capture an additional set of stocks that are within 5% of trading below their 200-week moving average – a trend line that shows that average price of a stock over the last 200 weeks). 

We also display each stock’s price-to-earnings (P/E) ratio, as well as its beta (a measure of volatility versus the overall market). These are not used in the screening criteria, but rather to provide a reference point for noting the valuation and volatility of the stocks on the list.

As of Thursday’s close, this screen produced the following 21 stocks: 

Highs And Lows 

Each week, we also monitor any stocks in the market making new 52-week highs. We do this because any stock on its way to generating 2x, 3x, or 10x returns will spend a lot of time making new 52-week highs along the way. Thus the new 52-week-high list provides an opportunity to flag these potential high performers before they really break out, with a particular emphasis on lower profile, less widely-followed stocks that might have otherwise gone unnoticed. 

Notable stocks making new 52-week highs last week: 

  • Automatic Data Processing (ADP) 
  • Annaly Capital Management (NLY)
  • Arthur J. Gallagher (AJG) 
  • Barclays (BCS)
  • Brown & Brown (BRO)
  • Intercontinental Exchange (ICE) 
  • Philip Morris International (PM) 
  • Progressive (PGR) 
  • Sony (SONY) 
  • Trinity Capital (TRIN) 
  • VeriSign (VRSN) 
  • Wheaton Precious Metals (WPM) 
  • Willis Towers Watson (WTW) 
  • XPeng (XPEV)
  • Yum! Brands (YUM) 

We also monitor stocks on the new 52-week-low list. In many cases, the names on this list are there for good reason – the market is often correctly pricing in their weak fundamentals. However, once in a while, a great business with excellent long-term prospects finds itself on this list due to a temporary setback. This can create the rare opportunity to buy top-shelf merchandise at bargain-basement prices. 

Notable stocks making new 52-week lows last week: 

  • Vail Resorts (MTN)
  • Alpha Metallurgical Resources (AMR) 
  • Canadian Natural Resources (CNQ) 
  • Diamondback Energy (FANG) 
  • Foot Locker (FL) 
  • H.B. Fuller (FUL) 
  • Hovnanian Enterprises (HOV) 
  • KBR (KBR) 
  • Krispy Kreme (DNUT) 
  • Peabody Energy (BTU)

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200% Upside From This Beaten-Down Data Provider

As part of our global hunt for value, this week we’ll take a closer look at an Israel-based data provider that helps companies understand and optimize their digital footprints. This company has regularly been making 52-week highs, which captured our attention. However, a recent short-term earnings setback caused the share price to crash by 40% in a matter of weeks. We believe investors may have significantly overreacted to a speed bump in an otherwise thriving business model. 

For Parter Pass members below, we outline a scenario where the company could recover from this setback to make new all-time highs. 

(To become a Partner Pass member, contact Lance James, our Director of Customer Care, at 888-610-8895, internationally at +1 443-815-4447, or via email at [email protected].)