To determine the "best all-around" CCC stocks each month, I first use the Dugan Stock Scoring System. Then, I filter using criteria I believe SA readers would value. The result is usually a list of 15 to 20 stocks which could outperform the market. Criteria are:
- Being in the top Dugan-scoring half of the non-REIT and non-MLP companies on David Fish's "All CCC" list, found here.
- Minimum 8 years on the CCC list.
- Minimum yield of 2.25%. Minimum $3B market cap.
- Maximum relative Graham number of 80.
- Maximum payout ratio of 70.
- Minimum most-recent dividend increase of 5%.
- Minimum estimated EPS growth next year of 5%.
- Minimum estimated EPS growth for the next 5 years of 5%/year.
- Maximum debt/equity ratio of 1.
- Minimum Dugan Score of 48
While filters 2 through 10 reflect individual preferences, the most important filter is number 1 because it assures I am filtering only very high quality companies.
The Dugan Scoring System is a tool to identify the overall quality of CCC companies. I believe there is a strong correlation between Dugan Scores and the quality of individual stocks. Those companies' stocks earning high Dugan Scores are high quality stocks which should produce better investing results, going forward, than otherwise would be attained by simply filtering for desired characteristics. This proved true in 3 different tests done during 2016, the results of which can be found here.
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 FUTURE PROSPECTS, as exemplified by: high EPS growth forecasts for this year, next year and 5 years out, and excellent dividend growth histories.
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.
But, no stocks, like no people, are perfect. Even high quality and high scoring stocks have weaknesses, the same as low scoring and low quality stocks have some strengths. 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 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 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. For a few months I'll show both 2016's and 2017's formulas for comparison purposes. 2017 was used for this article.
After calculating the Dugan Score, a small bonus, or penalty, is applied to the earned score for each CCC stock, based on a few brokers' recommendations for current sector weightings. The base bonus or penalty calculation is simple: market weight earns zero points, overweight earns 1 point, underweight earns minus 1 point, net/net from each of the 3 brokers.
Using the 2017 Dugan Scoring System and the above filters yield the following 11 companies as the highest scoring, filtered, February 2017 CCC companies:
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/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.