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 Dugan Stock Scoring System is a tool to identify the overall quality of non-REIT and non-MLP CCC companies. 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.
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 future 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 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 future 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 scoring December 2016 CCC stocks in four market cap categories. No filters were applied.
As a word of caution when you review the tables. Some stocks in the CCC list have "n/a" in some column metrics. I don't know why this happens. When this does occur, zero points are awarded for that category. Some companies have many "n/a's". This results in very low scores that may not fully deserved.
Here are the "worst" filtered stocks with market caps exceeding $100B:
Here are the "worst" stocks with market caps between $30B and $100B:
$10B to $30B:
Up to $10B:
There are some iconic names on the lists of "worst" stocks. Many of them have been on the CCC list for decades and many represent popular, large companies with widely held stocks. Because of these characteristics some backlash usually occurs when the "worst" 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 metric 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 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" lists. 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 JNJ.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.