The Big Secret On Wall Street

Cutting The Losers, Doubling Down On Winners

Posted onAuthorPorter & Co.

This is Porter & Co.’s The Big Secret On Wall Street, our flagship publication that we publish every Thursday at 4 pm ET. Once a month, we provide to our paid-up subscribers a full report on a stock recommendation, and also a monthly extensive review of the current portfolio… At the end of this week’s issue, paid-up subscribers can find our Top 3 “Best Buys,” three current portfolio picks that are at an attractive buy price. You can go here to see the full portfolio of The Big Secret.

Every week in The Big Secret, we provide analysis for non-paid subscribers. If you’re not yet a paid subscriber, to access the full paid issue, the portfolio, and all of our Big Secret insights and recommendations, please click here.

It’s been just over three years since we launched The Big Secret On Wall Street in June 2022. 

Given our focus on long-term investments, this three-year mark has provided an adequate track record to officially review the results to date. We’re currently finalizing the analysis, and will publish a “report card” that grades our performance in next week’s Big Secret.

This week, we’ll perform a comprehensive review. Our primary objective is to keep our portfolio stacked with best-in-class businesses that are also likely to be power-law winners, driving long-term portfolio returns through the ups and downs of the overall market. 

Specifically, we want companies with the following characteristics: 

1. High and consistent return on equity (“ROE”) in excess of 20%

2. Capital efficiency, indicated by free cash flow (“FCF”) margins exceeding 10% 

3. Evidence of excellent capital allocation (i.e., management teams that favor shareholder returns over capex and acquisitions)

4. Revenue growth of at least 5% per year over the long run (i.e., three years or longer) 

Very few companies in the world can satisfy these criteria consistently over time. And as we looked back and assessed our performance, it’s clear that sticking with these simple criteria has rarely failed. When we’ve deviated from these guidelines, it has almost uniformly led to poor returns. 

As a result, we plan to prune a significant number of companies in the current Big Secret portfolio that have failed to meet these criteria, as well as any companies where the fundamental thesis hasn’t panned out as expected.  

We’re also making some changes to how we officially track the performance of our recommendations. One of the key insights we’ve gathered from analyzing our results is the need to provide a “real world” track record – specifically, that means incorporating position sizes for each recommendation, based on our risk-rating scale. 

Recall that we created our risk-rating system, using a scale of 1 (lowest risk) to 5 (highest risk). And the general guideline we’ve provided for subscribers is to size positions according to risk, with smaller positions for higher risk positions and vice versa.

But until now, we haven’t incorporated this risk-weighting approach into our model portfolio. Going forward, we plan to allocate hypothetical investment dollars into our tracking portfolio, using a maximum $10,000 investment into our lowest-risk ideas (rating 1) and scaling down the position size in increments of $2,000 with each step up in the risk rating, as shown below: 

  • $10,000 for risk rating 1
  • $8,000 for risk rating 2
  • $6,000 for risk rating 3
  • $4,000 for risk rating 4
  • $2,000 for risk rating 5

Importantly, you should not take this as a formal recommendation to put $10,000 into each risk-rating 1 stock, or $2,000 into a risk-rating 5 stock. Instead, this general position-sizing framework aims to provide a realistic tracking portfolio that incorporates both the risk and return potential of each portfolio holding. 

As always, nothing we publish should be considered specific investment advice. Whether to take action on any recommendation, and how much to invest, is always a decision each individual must make based on their own personal financial situation. 

Our development team is currently implementing this new system into our model-portfolio page, and we’ll provide an update when the new system is in place. 

In the meantime, let’s move on to the portfolio review, where we’re making some significant changes. We’ll work through each portfolio sub-category, starting with the Commodities & Energy section. 

Commodities & Energy Review