Marty Fridson’s Stock Screen

An Extremely Effective Method For Finding Hidden Gems

In today’s Saturday Stock Screen, we are following Marty Fridson’s proprietary method for picking stocks that outperform the market.

Each week, here at Porter & Co. 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’re 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 or any of our other portfolios.

Most people know Marty Fridson as the distressed-bond expert. He’s regarded by Investor’s Digest as “the most well-known figure in the high-yield world.”

But Marty’s investment prowess doesn’t stop at bonds. He also is a fantastic stock picker, as evidenced by the performance of the six companies whose shares Marty has recommended in his Distressed Investing advisory, which are up roughly 35% in a little over two years.

The screen we’re introducing this week is based on Marty’s extremely effective method for picking outperforming stocks.

In 2023, Marty published The Little Book Of Picking Top Stocks. In this book Marty focuses on analyzing the best-performing stocks in the S&P 500 in prior years, and on the factors that led to their market-beating returns.

Today’s screen is based on the following characteristics Marty identified in The Little Book Of Picking Top Stocks as the common features among the market’s best-performing stocks:

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
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)

To further explain our methodology…

We apply Marty’s first criterion by screening for bond ratings of Baa3 or lower by Moody’s and BBB- or lower by Standard & Poor’s.

Marty explains:

Stick to below-investment-grade companies or at most, those that are rated just one notch higher than that. If anything, consider the lack of a Moody’s rating a favorable sign. Equity analysts may not pay a lot of attention to bond ratings, but you should if you’re searching for #1.”

We apply Marty’s second criterion to our screen by only including stocks with a Fridson-Lee statistic of 18% or higher.

The Fridson-Lee statistic is calculated by subtracting the lowest EPS estimate from the highest, and then dividing by the lowest estimate. Historically, #1 stocks have shown a greater spread in EPS forecasts than their #250 counterparts, with a median difference of 33.9 percentage points.

Marty’s research revealed that #1 performers have a wide dispersion in Wall Street analysts’ EPS estimates – for instance, last year Palantir Technologies (PLTR), the top-performing S&P 500 stock, had EPS estimates ranging from $0.25 to $0.40. Wider EPS estimates suggest there’s greater uncertainty and potential upside.

Explains Marty: “In 90% of the cases we examined, the Fridson-Lee statistic just prior to takeoff was 18% or higher, with some stocks clocking in at nearly 200%. Those numbers identify the territory where you have the best chance of finding #1.”

We apply this next component to the screen by only including stocks with a beta of at least 1.5.

These top performers will also experience significant price fluctuations, with a beta greater than 1.5 (a beta of 1 equals the volatility of the overall stock market, while those above 1 are more volatile, and those below 1, less volatile) and therefore carry a greater risk of substantial losses – but are more likely to double compared to those with betas closer to 1.

Stocks that trade within a narrow range aren’t prime candidates to double in price in the space of 365 days,” writes Marty. “That would be the financial equivalent of a leopard changing its spots.”

The last characteristic of Marty’s screen includes stocks with a market capitalization equivalent to 50% of the prior’s year average-performing stock.

Smaller market cap stocks tend to outperform larger, more established companies due to their higher-growth potential. Historically, half of the #1 performers had market caps less than one-third of this benchmark. However, some outliers like Tesla (TSLA) in 2020 showed that exceptions can occur. Therefore, this parameter should be used in conjunction with other metrics rather than as a standalone filter.

Conventional equity research, overly focused on metrics like EPS, fails to pinpoint these high flyers. The conventional wisdom can’t be applied to finding the best performers – that is, the outliers. Instead it requires a blend of quantitative and qualitative criteria that should be used in conjunction to spot them before their meteoric rise.

In addition to Marty’s criteria from The Little Book Of Picking Top Stocks, we’ve added a quality screen to include companies with a return on assets (“ROA”) or return on equity (“ROE”) greater than 15%.

As of the close of trading on Thursday, March 20, the following nine stocks met these criteria:

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:

AngloGold Ashanti (AU)
Antero Midstream (AM)
Embraer S.A. (ERJ)
Gold Fields (GFI)
Hess Midstream LP (HESM)
Intercorp Financial Services (IFS)
McKesson (MCK)
MP Materials (MP)
Mueller Water Products (MWA)
Triumph (TGI)
Yum China (YUMC)
Berkshire Hathaway (BRK/A)

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:

Boston Beer (SAM)
Diageo (DEO)
Etsy (ETSY)
Floor & Decor (FND)
LCI Industries (LCII)
J.B. Hunt Transport Services (JBHT)
Polaris (PII)

Only a small allocation of one’s portfolio should be allocated to the types of stocks revealed by using Marty Fridson’s Stock Screen – this isn’t going to find the typical “forever stock” we normally focus on. Rather, this screen hunts for the market’s next big winner.

For Partner Pass members this week, we have selected an opportunity from the screen that appears particularly compelling – not as an official recommendation, but as a stock that we will keep on our radar.

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

FOR PARTNERS ONLY

For Partner Pass members, we’re highlighting a disruptive payments company that emerged from Marty’s Stock Screen. It’s a business with a sub-$10 billion market cap. The company’s cash flows have doubled since 2022, reaching $500 million last year. Revenue and free cash flow are projected to grow by 30% annually through 2028, with free cash flow expected to surpass $1 billion by then.

It’s an under-the-radar, misunderstood company that has transformed itself from a legacy point-of-sale (“POS”) provider at checkout into a full end-to-end payment processor, accepting funds from consumers and dealing with back-end banking. Today, it’s the biggest payments processor in the U.S. sports and entertainment industry and a close second in the restaurant sector.

Profitable since 2004, the company has delivered double-digit annual growth in payment volume and revenue every year – even during the Global Financial Crisis and the pandemic. Since its IPO in June 2020, EBITDA (earnings before interest, taxes, depreciation, and amortization) has skyrocketed more than 7x, to $677 million in 2024, while the share price has only risen 2.6x.

(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].)