Every month, I use the Dugan Stock Scoring System, and what I think are just a few meaningful filters for SA readers, to determine the "best" and "worst" of David Fish's All CCC companies for that month.
The filters used in this analysis are market cap greater than $5B and yield between 4% and 7%. While some may take exception to using a yield cap of 7%, it's my opinion that a non-MLP or non-REIT company with a yield greater than 7% signals some problems. BDC's might be an exception, so I left them in, but none made the top 10 cuts.
When investing, I want to invest in only "good" stocks. Who wouldn't? The very first step I always take is to separate good companies from not-as-good companies. The Dugan Stock Scoring System enables me to easily make that separation for CCC companies' stocks.
A "good" stock is one which has a blend of performance characteristics (columns in CCC) which mark a stock as having stronger current conditions and better future performance expectations, than other stocks.
The Dugan Stock Scoring System is a tool to identify the overall quality of non-REIT and non-MLP CCC stocks. Those CCC stocks earning high Dugan scores are high-quality stocks that should produce better investing results going forward than otherwise would be attained by simply filtering for desired characteristics. This premise has proven to be true based on actually purchasing significant volumes of 9 stocks using the system, comparing that 9-stock portfolio's performance to the S&P 500 and reporting the results here on SA. At last report, that 9-stock portfolio has more than doubled the S&P 500 return ytd.
When one scores and ranks stocks looking for those which are "best all-around," by quality, it follows that it is an easy task to also identify the worst all-around, by quality. In this context, highest-quality means companies that 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 FUTURE PROSPECTS, as exemplified by: high EPS growth forecasts for This Year, Next Year and 5 years out, and excellent dividend growth histories.
The "worst" stocks would therefore have weaker current conditions, poorer prospects, or both. In other words, while the "worst" may be household names, they may have combinations of poor value as measured by a very high relative Graham number or high P/E, both signaling significant over-valuation; and/or high payout ratio, high debt/equity ratio and/or low Most Recent dividend increase %.
The Dugan Scoring System 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. 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 that the Dugan Scoring System is about 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 has performed for its owners in the past. What only matters are the current condition and expected future performance of the stock.
The table below 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.
At any point in time, every company is a blend of strengths and weaknesses. Since no company is perfect, every company has some of each. Same for every person, by the way. The strengths and weaknesses come from both internal (the company itself) and external (market) sources. The company's stock may or may not, at that point in time, reflect all those strengths and weaknesses.
The Dugan Stock Scoring System calculates scores for many current-condition and future-prospect variables and then determines the sum. The net sum of those plusses and minuses for each company's stock, when compared to the same for all other CCC companies, establishes a stock as, relatively, either strong (top half of Dugan Scores) or weak (bottom half of Dugan Scores). Strong stocks have, on balance, strong current conditions and excellent prospects. Weak stocks may have some of each of those, but not enough to qualify as candidates for buying, or maybe even for holding.
The Dugan Stock Scoring System produced the following lists as the lowest and highest scoring November 2016 CCC stocks with a yield between 4 and 7% and a market cap greater than $5B. No other filters were applied.
As a word of caution when you review the tables, some stocks in the CCC lists have "n/a" in some column metrics. I don't know why this happens. When it does occur, zero points are awarded for that category. This can result in very low scores that may not fully be deserved.
Here are the "worst" high-yield filtered stocks with market caps exceeding $5B:
Here are the "best" high-yield stocks with market caps exceeding $5B:
There are some iconic names on both lists. Many of them have been on the CCC list for decades and represent popular, large companies with widely held stocks. In the case of those which made the "worst" list, some backlash frequently occurs when the lists are published each month. That's okay, because it causes us all to do some critical thinking about our holdings. Causing that thinking is part of the reason I write the "worst" articles, and endure some caustic comments. Causing that thinking is also why I write the "best" articles. This is just information, which someone said is "data, endowed with relevance and purpose." The information may cause some to make decisions. Those decisions are yours alone.
In my mind, the reasons any stock qualifies for the "worst" list are obvious, from both the stock's Dugan Score and, if one takes the time to look at the individual stock's performance as evidenced in each column in the CCC table above and then compares the company's performance in that column with the averages shown at the bottom of the table. And any specific relative metric performance doesn't necessarily mean the stock is "bad." It could simply mean they are greatly overvalued and thus have earned zero points for "value" in the scoring system. But usually it also means their dividend growth history is relatively poor in any or all the most-recent, 1-, 3-, 5- or 10-year periods; or EPS growth is forecasted to be poor for this year, next year or 5 years out; or payout ratio is high (maybe because of a one-time, non-cash write-off of an underperforming asset) or debt/equity ratio is too high. So, if one of your core positions is on the list, please look at its relative performance in each of those important areas by comparing it to the averages at the bottom of the list. Doing so will answer your question as to why your stock made the "worst" list.
I'm not suggesting selling any stock on the "worst" list. But, I am suggesting that there are better investing opportunities on the CCC list to own over the next few years than those whose stock metrics caused them to earn a low Dugan Score and thereby land on the "worst" list. Again, it doesn't matter how iconic is the company, or how well it has done for its owners in the past. What matters is only its current condition and future performance expectations.
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 VLO. 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.