Introducing A New, Improved Dugan Stock Scoring System For 2017

by: Dennis Dugan

Summary

The purpose of the modifications is to introduce ROE as a measure and increase the influence of "Most recent dividend increase."

The new formula doesn't change the results very much.

That's a good thing since the results have been so outstanding so far.

Those who follow me have become familiar with my Dugan Stock Scoring System, with which I evaluate and score stocks included in the All CCC tab of David Fish's monthly CCC lists. You also know that a test I'm running comparing the 2016 performance of a 9-stock DSSS-selected portfolio is outperforming the S&P 500 by 2 times through the first 9 months of this year.

In spring 2015, I created the Dugan Stock Scoring System (DSSS) to be applied to David Fish's All-CCC stocks. David's all-CCC list contains almost 700 long-term dividend-paying stocks (not including REITs and MLPs) with histories of raising dividends for a minimum of 5 years to over 50 continuous years). You can find David's November CCC list here. Click on the "Excel Spreadsheet" link in the U.S. Dividend Champions section. Alternatively, you can type in David's name in the "search by" box in the upper right corner of any SA page and "follow" David and you will then receive a notice each month when he publishes the CCC list.

I introduced the stock scoring system in a Seeking Alpha article on 8/21/2015. Toward the end of 2015, I made some formula changes, most of which were suggestions that came from SA readers.

The Dugan Stock Scoring System is a tool to identify the overall quality of CCC companies. Those companies' stocks earning high Dugan Scores are high quality stocks which should produce better investing results than otherwise would be attained by simply filtering for desired characteristics. In this context, highest quality means companies which have:

  • STRONG CURRENT CONDITIONS, as exemplified by: great value as measured by relative Graham number, low payout ratio, low debt/equity ratio and high Most Recent dividend increase %
  • EXCELLENT PROSPECTS, as exemplified by: high EPS growth forecasts for This Year, Next Year and 5 years out; and excellent dividend growth histories.

DSSS isn't a popularity contest. It is a disciplined, systematic and dispassionate approach that evaluates each CCC stock based on a wide variety of investment criteria from four broad categories: Risk, Value, Past Performance and Future Performance Expectations. So, the purpose of the Scoring System is to determine the all-around quality of a stock for buying, holding or selling purposes. No stocks, like no people, are perfect. Therefore, even high quality and high scoring stocks have weaknesses. So, a Dugan Score is a balanced, holistic picture of a stock, which includes its strengths and weaknesses.

You can see from the above explanations, the Dugan Stock Scoring System calculates a score based on the current state, and expected future performance, of a company's stock; not necessarily the company itself. And, it doesn't matter how well a company's stock had performed for its owners in the past. What only matters are the current condition and expected future performance of the stock.

I have made some changes to the formula which I'll put in place from here forward. The primary reasons were to introduce return-on-equity as a new measure and significantly increase the relative importance of the most-recent-dividend-increase. To do those two things and still keep the maximum score at 100 points, I needed to adjust some measures downward and tweak a few others. Below is a comparison of the two formulas:

2017 vs 2016 DSSS formula

I ran the DSSS on David's November CCC list using both formulas, and no filtering, and it produces the following results:

2017

results with 2017 formula Click to enlarge

2016

results of 2016 run Click to enlarge

You can see there were only 4 changes in the top 25 companies from 2017 to 2016: Kingston, Dow, Gildon and Am Trust.

In creating the formulas, obviously some measures are held to be more important than others. I consider any measure with a max score of 5 or more to be a driver of results, while a max score of 4 or fewer points is a modifier. As I gain more experience with ROE it may be moved up to the driver category.

Thanks to a few SA commentators for their valued, anonymous suggestions. I do believe these changes will improve on an already well-performing tool for SA readers.

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 AIZ, PRU, MGA, VLO, LNC, TSO, SCS, DOW, GLW, MHLD.

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.