A Capital Light Business Trading At A Discount

Screening For Compounders On Porter’s 3x Screen

Each week, here at Porter & Co., we apply our financial brainpower to uncover the most compelling, highest-upside investment ideas. And with this complimentary issue of the Daily Journal, we open up our spreadsheets to show you how we do it.

An important part in our analytical toolbox is our stock screens, where we 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 identify the tiny fraction of U.S.-listed stocks that offer the best opportunities for creating huge returns.

We often use the results from these screens as a starting point for more in-depth analysis for possible inclusion in the Complete Investor portfolio.

This week, we’re revisiting a popular stock-filtering tool we call Porter’s 3x Stock Screen. Over the last 25 years, buying an equally-weighted basket of stocks generated from the 3x screen has tripled the return over the overall stock market (the S&P 500). Below we also show the names of significant stocks hitting 52-week highs and 52-week lows – a helpful list that we use to guide our analysis.

For Partner Pass members, in the Saturday Stock Screen, we’ll occasionally (like today) highlight an opportunity that we found from the screen that appears particularly compelling – not as an official recommendation, but as a stock that’s on our radar.

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

Porter’s 3x Stock Screen

The 3x Screen was inspired by Porter himself, who challenged the Complete Investor 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:

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
Market capitalization of at least $300 million

We performed a backtest of these criteria on a hypothetical portfolio that held an equal dollar amount of each stock on this list, and rebalanced the portfolio each quarter – to add new stocks that met the criteria, and sell stocks that no longer did. The chart below shows that the stocks selected by this screen delivered a total return of 2,286% over the last 25 years versus a 723% return in the S&P 500, for outperformance of 3.2x.

As of Thursday’s close, this screen produced the 29 stocks shown in the table below. We have displayed each of the criteria noted above along with each company and ticker symbol, as well as each stock’s beta (a measure of volatility versus the overall market). Note that beta is not used in the screening criteria, but rather to provide a reference point for noting the volatility of the stocks on the list.

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 a new 52-week high this week:

ASML (ASML)
Analog Devices (ADI)
ATI (ATI)
Bank of America (BAC)
Biogen (BIIB)
BOK Financial (BOK)
BorgWarner (BWA)
Casey’s General Stores (CASY)
Citizens Financial (CFG)
C.H. Robinson Worldwide (CRHW)
Comamerica (CMA)
Carpenter Technology (CRS)
DuPont de Nemours (DD)
Expeditors International of Washington (EXPD)
Expedia (EXPE)
ExxonMobil (XOM)
Ford Motor (F)
FedEx (FDX)
FirstCash (FCFS)
General Dynamics (GD)
General Motors (GM)
Globus Medical (GMED)
Goldman Sachs (GS)
Alphabet (GOOG)
Hyatt Hotels (H)
Hasbro (HAS)
HEICO (HEI)
Hilton Worldwide (HLT)
Howmet Aerospace (HWM)
JBT Marel (JBTM)
JPMorgan Chase (JPM)
Micron Technology (MU)
Morgan Stanley (MS)
Taiwan Semiconductor Manufacturing (TSM)
Wells Fargo (WFC)

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 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 a new 52-week low last week:

Albertsons Companies (ACI)
CDW (CDW)
Campbell’s (CPB)
CoStar (CSGP)
GoDaddy (GDDY)
General Mills (GIS)
HP (HP)
Kraft Heinz (KHC)
Kimberly-Clark (KMB)
Lamb Weston (LW)
Mondelez International (MDLZ)
Sprouts Farmers Market (SFM)
Workday (WDAY)

FOR PARTNERS ONLY

A Digital Monopoly At A Rare Discount

The company we have selected to highlight emerged from Porter’s 3x Screen and represents a de-facto monopoly embedded at the center of a mission-critical workflow. For much of the global creative economy, this software is the lifeblood of design.

The business benefits from highly recurring revenue, exceptional customer lifetime value, and durable pricing power reinforced by deep workflow integration. While the company is experiencing near-term weakness, the core business remains intact and well positioned to benefit from an infusion of artificial intelligence (“AI”). As a result, we see a rare opportunity to invest in a dominant franchise at an attractive valuation.

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