Last spring, I created the Dugan Stock Scoring System for David Fish's CCC stocks and introduced it to SA readers in a SA article on 8/21/2015. Toward the end of 2015, I made some formula changes, most of which were ideas that came from SA readers. I will introduce a few more formula additions later this year.
The Dugan Stock Scoring System is a tool to identify those CCC companies which are, overall, the highest quality and which should (because of that better quality) produce better investing results than otherwise would be attained by simply filtering for desired characteristics. In this context, quality means companies which have strong current conditions and excellent future prospects.
Strong current conditions are exemplified by: great value as measured by low relative Graham number, low payout ratio, low debt/equity ratio and high most recent dividend increase %. Excellent future prospects are exemplified by: high EPS growth forecasts for this year, next year and 5 years out, and excellent dividend growth histories.
Simply put, the Dugan Stock Scoring System is a disciplined, systematic process that evaluates each CCC stock on the basis of a wide variety of investment criteria from four broad categories: Risk, Value, Past Performance and Future Performance Expectations.
No stocks, like no people, are perfect. Even high-quality and high-scoring stocks have weaknesses. So, a Dugan Score is a balanced, holistic picture of a stock, which includes both its strengths and weaknesses. The following is a summary of the metrics used in the Dugan Stock Scoring System, along with each metric's relative weighting in the overall formula. The weightings are my assessment of each metric's relative importance in calculating the company's overall quality.
Every month I apply the scoring system to David's "All CCC" spreadsheet. After scoring all 750 or so companies, I eliminate REITs and MLPs, then throw out the bottom-scoring 50%, leaving 350+ companies which are the best-of-the-best. I then filter those 350 companies by characteristics which I believe align well with SA readers' needs.
The filters might include:
- Minimum 8 years on the CCC list.
- Minimum $3 to $10B market cap.
- Maximum relative Graham number of 80.
- Maximum payout ratio of 70.
- Minimum most-recent dividend increase of 6%.
- Minimum estimated EPS growth next year of 6%.
- Minimum estimated EPS growth for the next 5 years of 6%/year.
- Minimum yield of 2.3%
The result of filtering those best-of-the-best CCC stocks is a list of +/- 15 companies that have strong current conditions, excellent future prospects and have been filtered for characteristics which I value. The difference between my system and a usual filtering process is I only filter companies which are high quality and whose strengths far outweigh their weaknesses. I believe this quality difference will produce better investing results, while still meeting my individual requirements.
I present those 15+ stocks to SA readers for them to consider as possible purchase candidates. The articles which present those lists usually carry titles like "April's top 15 CCC companies" or "March's top large cap CCC companies." They can be found by searching for my name in the search box in the upper right corner of the SA site.
This process is what I use to guide my own investing buying and selling.
Believing in the efficacy of the Dugan Stock Scoring System to identify excellent companies to purchase, in January and early February of 2016, I bought significant dollar amounts of 9 stocks. All 9, except AbbVie (NYSE:ABBV), are stocks which came from recent "top 15 stocks" lists in my "Best of …" articles, mostly in December. Those 9 stocks are the only ones I've purchased in 2016.
About a month ago, I did a quick analysis to see how my actual purchases had performed relative to the S&P 500. My actual purchases outperformed the S&P 500 by a whopping 52%.
Today, I did the same analysis and my actual purchases have increased their relative "better performance" from 52% to 80% better than the S&P 500 over the period from purchase date to 4/22/2016.
As said a month ago, I realize that 9 stock purchases is a small sample set and that 3+ months of relative performance is too short a time to draw firm and final conclusions. But, I'm very happy with the significant outperformance so far. And, I'll again report progress on these 9 purchases later in 2016.
I hope you enjoyed this journey. Comments are encouraged. Happy investing.
Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation. (Borrowed from Chuck Carnevale.)
Disclosure: I am/we are long CMI, XOM, ABBV, WRK, BBY, TROW, PRU, TROW.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.