Nov. 30 Update: Dugan Stock Scoring System's January 2016 Purchases Massively Outperform The S&P 500 YTD

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Includes: ABBV, ADM, BBY, CMI, NGVT, PRU, TROW, WRK, XOM
by: Dennis Dugan

Summary

The Dugan Stock Scoring System (DSSS) is designed to identify high-quality stocks that will outperform the market.

In its tenth real-world monthly test,the DSSS-selected real 9-stock portfolio again blew away the S&P 500, outperforming by 121% (up from 105% last month).

This more than doubling S&P 500's performance is led by Cummins, Best Buy, Westrock and Prudential.

I'll provide one more update, near the holidays, declare victory and move on to our 2017 challenge which was announced here. For reference, 2016 was truly an outlier. In normal times, I would quite happy to beat S&P 500 by 10%. Clearly, some good fortune enabled 2016's outstanding results.

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, DSSS 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.

The table below is a summary of the metrics used in the 2016 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. The formula for 2017 was changed slightly and announced here.

To gain an understanding of how the system applies the formula for each metric in the system, please see this article.

In addition to the base scoring system there can be a small bonus, or penalty, applied to the earned score for each CCC stock. It is based on a few brokers' recommendations for sector weightings. The base bonus or penalty calculation is simple: market weight for a sector earns zero points, overweight earns 1 point, underweight earns minus 1 point.

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 something like:

Minimum 8 years on the CCC list Minimum $5 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 prospects and have been filtered for characteristics which I, and I believe SA readers, value. The difference between my system and a usual filtering process is that I only filter companies which meet the test for being high quality and whose strengths far outweigh their weaknesses. I believe this difference will produce better investing results, while still meeting my individual requirements.

I present those 15+ stocks to SA readers for consideration as possible due diligence/purchase candidates. The articles which present those lists usually carry titles like "October's top 15 CCC companies" or "September'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.

Believing in the efficacy of the DSSS 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 then-recent "top 15 stocks" lists in my "Best of …" series of articles, mostly in December.

Since March, I have been reporting the relative performance of this actual 9-stock portfolio to the S&P 500. Below is the information for the end of November 2016 period:

nov 30 update

Asterisk from WestRock (NYSE: WRK), above. Earlier this year, WRK spun off part of itself into a separate publicly-traded company called Ingevity Corporation (NYSE: NGVT). To calculate the 58% gain, I added the current market value of my positions in WRK and NGVT, and divided by my original cost of WRK.

The monthly outperformance historical numbers are:

As said many times in the last few months, I realize that 9-stock purchases is too small a sample set and that 11 months of relative performance is too short a time to draw final conclusions. But, I'm very happy with the significant outperformance so far. I have started the process of selecting and purchasing the stocks for 2017's test based on articles and tables recently published in SA and using the DSSS, CCC, FASTGraphs, and Schwab. You can see 2017's entries here.

I hope you enjoyed this journey. Comments are encouraged. Successful 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 ALL THE STOCKS MENTIONED IN THIS ARTICLE.

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.