I use the Dugan Scoring System and what I think are meaningful filters for SA readers to determine the "top" companies. For this exercise, those criteria are:
- Being in the top-Dugan-scoring half of the non-RIET and non-MLP companies on the "All CCC" list. This is a stringent quality qualifier
- Minimums of $3B market cap and 2.3% yield.
- Maximum relative Graham number of 100 (this is pretty lax).
- Maximum payout ratio of 100 (this is very lax)
No filtering minimums are set for earnings growth forecasts or dividend growth histories.
The purpose of the Dugan Scoring System is to identify, by calculation, CCC companies which are, overall, high quality companies, albeit even with weaknesses in a few individual performance, or expectations, metrics. Every stock's combination of metrics shows both strengths and weakness. All metrics, taken by themselves, are of limited value to an investor. When combined with other metrics, however, they can paint a valid holistic picture of the overall quality of a company. This holistic picture is represented by a Dugan Score, wherein the higher the score, the higher the overall quality of the company. No stocks, like no people, are perfect. But, again, a higher score doesn't necessarily mean a company is acceptable to an individual investor, because a particular metric may be a no-go for that investor, i.e. the yield may not be high enough, even though the company is, overall, a very high quality performer with a great predicted future.
The following is a summary of the metrics used in the Dugan 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.
Readers might prefer different weightings for the metrics. The above weightings reflect my thoughts and values, but can be changed by any enterprising SA reader who is facile with Excel.
Using the Dugan Scoring System, and the above filters, yields the following as the highest scoring 3 companies in each sector. Note, the Health Care sector had only 2 companies that made it through the filters:
Let's use the information in the CCC list above, and FASTGraphs, to take a closer look at the top scoring company in the Consumer Discretionary sector, Magna International, Inc. (NYSE: MGA).
In the CCC picture above MGA scored very well in Dugan Score at an impressively high 125. I think the highest score ever was 128. MGA has decent yield and size at slightly over 2.5% and $16B respectively. Its most recent dividend increase at 14%, low payout ratio of 21% and very attractive valuation with a relative Graham number of minus 19%, coupled with double digit annual expected EPS growth rates for both next year and the next 5 years mark MGA as a company with a solid current condition and very attractive future potential. Let's not forget that future predictions are based on analysts' expectations, which may or may not be accurate. Capping off the explanation for why MGA scored so well is the great DGR history, being in, or very close to, double digits for all 4 periods shown. That's truly impressive.
Let's now double check the impressive past, present and future with a few FASTGraphs below:
Note, above, a P/E ratio of only 8.6 versus a long-term historical 10.8, a 19year annual earnings growth rate average of 7.1%, a low debt to capitalization ratio of 20% and an investment grade credit rating of A-. Note also that MGA's share price tracked just low of its Fair Price orange line for many years until the great recession, took a few years to recover to that position in mid-2013 and has performed relatively poorly in the 2 years since, with the share price dropping for $56 to $40 in the last 8 months, but showing a recent small recovery.
So, what about the future. Look at the forward-looking FastGRAPHS below.
Follow the dotted line from its current position to year-end 2017. If MGA performs well enough such that it gets back up to its normal long-term P/E of 10.8, it will provide investors with an impressive annual rate of return (ROR) of 29.38% (See box above the dotted line). But, will it?
Toward the bottom of the above, there is a row titled "# Analysts." There are 16 who made forecasts for 2016 and 2017 and only 2 who were willing to go out to 2018. That's why I drew the dotted line to year-end 2017 versus 2018. I don't believe only 2 analysts are worth trusting. Now, look inside the Analyst Scorecard box inside the squiggly red circle/oval. The small red rectangle at the right of the 1Y row reads 33%. That means the analysts are right in their 1 year projection 67% of the time. On the 2Y row, the little red box reads 13%, meaning the analysts are right 87% of the time, when forecasting out 2 years. The 2 year projection, which is the dotted line, shows the aforementioned 29.38% expected ROR if investing today. Believe it? Or not? Further due diligence will answer the question for you.
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 BBY, ADM, PRU, QCOM, DOW, RS.
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.