Each Saturday, we sharpen up an important tool in our analytical toolbox, our stock screens, where we apply a list of criteria to sift through thousands of publicly traded U.S. stocks and identify just a tiny fraction of them that offer the best opportunities for creating huge returns.
This screen was inspired by the late Charlie Munger, Warren Buffett’s business 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:
- Return on equity (“ROE”) exceeding 20% as a filter for high-quality businesses
- 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
- Market capitalization over $1 billion to exclude micro-cap, low-liquidity stocks
- 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.
Click here to access previous Modified Munger Screens.
The 3x Screen was inspired by Porter himself, who challenged the Big Secret On Wall Street analyst team to create a filtering tool to find companies with high capital efficiency, steady revenue growth, and that trade at reasonable valuations… and to backtest the results to ensure the screening criteria selected stocks that generated market-beating gains over time.
One of the best screens we found in this search applies the following criteria:
- Market capitalization of at least $300 million
- Return on assets (“ROA”) of at least 15% over the previous five years
- Return on equity (“ROE”) of at least 20% over the previous five years
- Free cash flow (“FCF”) margins of at least 10% over the previous five years
- Sales growth of at least 5% over the previous five years
- P/E ratio of 25 or below
Click here to access previous 3X Screens.
This screen is based on the following characteristics Distressed Investing analyst Marty Fridson identified in The Little Book Of Picking Top Stocks, which he published in 2023, as the common features among the market’s best-performing stocks.
The applied screening criteria:
- Price volatility over the previous year of at least 1.5x that of the stock that ranked #250 that is the median of the S&P 500 by total return
- Market capitalization equivalent to 50% or less of the market capitalization of the stock that ranked #250 by total return in the previous year (some #1 stocks have been exceptions to this rule)
- Bond ratings of Baa3 or lower by Moody’s and BBB- or lower by Standard & Poor’s
- Fridson-Lee statistic (defined below) of 18% or greater – meaning analysts’ estimates of the company’s earnings per share (“EPS”) vary widely
Click here to access previous Marty Fridson Stock Screens.
This screen is about finding future Lindys: businesses that combine invention with discipline, transforming broken industries through structural innovation, vertical integration, and cultural resilience. The new Emerging Lindy Screen is designed to uncover the next Amazon or Apple – the types of compounding machines we aim to own long before the world catches on.
The Emerging Lindy Screen blends qualitative insight with quantitative rigor, filtering for firms that exhibit both structural innovation and financial traction – early signals of future Lindy compounding.
- Zero-to-One DNA: Category creation and technological differentiation
- Forever TAM: Serving universal, durable human needs – compute, health, money, safety
- Founder-Led Mission: Long-term orientation and meaningful insider ownership
- Financial Traction: Sustained >25% revenue growth, expanding gross margins, high retention, and visible free cash flow inflection
- Path to Leverage: Operating expense as a percentage of revenue is declining, ROIC is rising steadily
- Vertical Integration: Expansion from a focused wedge into a self-reinforcing ecosystem
- Resilience: The ability to emerge stronger from cycles or shocks
By screening across these quantitative and qualitative dimensions, we aim to capture the moment when zero-to-one innovation turns into enduring compounding.
Here are the financial metrics we’ve used to produce today’s screen:
Sustained high growth
- Revenue CAGR (five year) ≥ 25%
Quality business with pricing power
- Average gross margin (three year) ≥ 50% or
- Average EBITDA margin (three year) ≥ 50% or
- Average EBITDA margin growth ≥ 30%
Efficiency improvement
- Operating margin growth (three year) ≥ 15%
Capital efficiency leading to compounding returns
- ROIC growth (three year) ≥ 15% or
- ROIC average (three year) ≥ 15%
Self-funding growth, demonstrating positive unit economics
- Positive FCF growth in at least three of last four years
Remove balance sheet outliers
- Net debt / EBITDA ≤ 6
Alignment and continuity (founder/operator)
- More than five insiders own shares
Click here to access previous Emerging Lindy Screens.