Porter’s Capital Efficient Stock Screen

The Key To Investing: Capital Efficiency And Owning Individual Stocks 

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 back the curtain to show you how we do it.

An important tool in our analytical toolbox is our stock screens, in which we apply a list of criteria – relating to different financial, accounting, and performance parameters – to sift through the 14,000+ 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. This week, we’re using a new stock filtering tool we call “Porter’s Capital Efficient Stock Screen.” 

Most people have been misled to believe that putting your money into broad indexes and minimizing volatility is the safest investment strategy, but this approach actually guarantees exposure to failing businesses and ignores true risk, which is permanent loss of capital. Instead of fearing price volatility, investors should focus on understanding and avoiding real business failure. 

If you want to achieve extraordinary investment results, the very best strategy is to own extraordinary businesses… which is why we’ve built “Porter’s Capital Efficient Stock Screen.” 

For Partner Pass members, in the Saturday Stock Screen, we’ll sometimes (but not this week) 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.

The filtering tool we’re showcasing this week is named “Porter’s Capital Efficient Stock Screen.” 

We tested a systematic approach that assumed we invested in all of the available stocks that met these ulte-high criteria:

• Free-cash-flow (“FCF”) margins above 10%
• Return on assets (“ROA”) above 15%
• More than 10% of revenue returned to shareholders
• Revenue growth of more than 5%
• Operating margins above 10%
• Return on invested capital (“ROIC”) greater than 20%.

We were able to access high-quality data going back 23 years, from which we’ve produced 17 years of outcomes – our approach requires five years of prior data to produce reliable results. This system produced a reasonable amount of stocks to buy each year. The largest total was 44 stocks. And the smallest group was only 22 stocks.

What you discover in these results shouldn’t surprise you: better businesses lead to better investment outcomes, especially over time. Over the last decade, this approach produced returns of almost 400% (17.4% annualized), outpacing the S&P 500’s 242% return by a wide margin. (Don’t forget, the last decade has been among the best ever for the S&P 500.)

While we don’t subscribe to the idea that volatility equals actual risk, a highly volatile approach to investing will make following the strategy impossible for most people. As you can see in the table above, over the full period (17 years) not only did this approach far outpace the market’s results (1,128.5% versus 458.7%), it did so with less volatility (beta: 0.98, where the market is 1).

Finally, we’ve ranked the screen by the top 25 companies rated by highest free-cash-flow margin. As of Wednesday’s close, this screen produced the following stocks, ranked in order from lowest enterprise value to greatest:

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

Highs And Lows

Each week, we also monitor any stocks in the market making a 52-week high. We do this because any stock on its way to generating 2x, 3x, or 10x returns will spend a lot of time making 52-week highs along the way. Thus, the 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 52-week high this week: 

• AGCO (AGCO)
• AutoNation (AN)
• Aramark (ARMK)
• Citigroup (C)
• Carnival (CCL)
• Capital One Financial (COF)
• Corteva (CTVA)
• CrowdStrike (CRWD)
• Emerson Electric (EMR)
• HEICO (HEI)
• Robinhood Markets (HOOD)
• Intuit (INTU)
• IDEXX Laboratories (IDXX)
• Johnson Controls International (JCI)
• Jabil (JBL)
• Juniper Networks (JNPR)
• Loews (L)
• MercadoLibre (MELI)
• Life360 (LIF)
• Cloudflare (NET)
• Labcorp Holdings (LH)

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We also monitor stocks on the 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 52-week low last week: 

• Ategrity Specialty Insurance (ASIC)
• Costamare Bulkers (CMDB)
• HUYA (HUYA)
• Summit Midstream (SMC)
• Tortoise Energy Fund (TNGY)
• Voyager Technologies (VOYG)
• The Western Union Company (WU)

Porter Stansberry
Stevenson, Maryland