The perfect stock does not exist... stop searching for it
I'm like everyone else. I want to find the perfect stock. That absolute sweet gem of a stock that has all the attributes of great stock market winners - a good company at a reasonable price that everyone else has missed. I've studied the market hard. I've read all the books. I know what works in stock picking. But I just can't seem to find it. I keep looking. I keep screening the market for it. But it's just not there. My stock screens are empty. Dammit. Why?
Everyone else is looking for the perfect stock too. When everyone is looking for the same thing, you aren't going to find it as they've already bought it. The market is just too efficient. But within this very human behaviour lies an incredible opportunity. What if all that searching means we all miss what's right under our nose? What if there are entire portfolios of "perfect stocks" hidden in plain sight.
Join me on my short adventure quest to discover them.
The Search
Let me put together a very typical stock screen, with a few parameters that might define the "perfect" stock. By that I mean something that's inexpensively valued, good quality, with growth prospects and market beating momentum. I'm keeping this basic, and I know everyone has their own definition - but humour me for simplicity's sake:
- When is something reasonably valued? Perhaps it would fairly priced against earnings (Price Earnings Ratio < 15) and paying dividends (Dividend Yield > 2.5%)
- When is something good quality? Perhaps it should be profitable (Return on Capital > 12%, Operating Margins > 5%) with not too much Debt (Gearing < 50%)
- When is something growing? Perhaps we'd look for strong earnings growth (EPS Growth > 15%)
- When is it showing momentum? Perhaps we'd look for relative strength better than the market index over the last year (Rel Strength 1y > 0%)
That's a good list of everyday screening rules. I'd love to find a share like that in this market. So I put together a stock screen that uses these parameters:
You can view the results of this screen at this link. Go on - click the link and come back and read more.
The title of this piece gave it away. In the UK Market there is not a single share that qualifies for those rules (except a couple of VCTs which I've excluded as they aren't individual companies). The perfect stock does not exist.
The Roundabout
What if I told you to stop looking so hard for the perfect stock and start allowing yourself to find the perfect portfolio instead? If you give up your desire for the perfect stock you can quite easily build a portfolio of 10, 20, 50 or even more stocks that have exactly the attributes you desire... or even better... not individually, but on average.
Sequential screening rules are a destructive mechanism. They cut, cut and cut away possibilities and all the best shares. The trick is to use 'simultaneous screening' rules that don't cut away possibilities. This is the benefit of ranking the market, rather than screening the market. It is inclusive, not exclusive.
As an easy shortcut I've downloaded the top 200 ranked shares (by StockRank) in the UK stock market (though this idea applies equally to all international markets). I've 'customised' my table view so that it adds all the above fields mentioned into the view - which you can download yourself as a list here.
I've exported them into a spreadsheet here - which I've then adapted into three sheets. The first has the top 200 shares. The second has the top 20. The third has the top 20 shares diversified across sectors (in the usual NAPS portfolio fashion).
Just look at the average and median statistics!
- The Top 200 shares have an average (median): P/E of 8, Yield of 3%, ROCE of 15%, No Debt, Margins of 18%, Earnings Growth of 65% and market beating relative strength of 4.5%.
- Both sets of Top 20 shares have even better metrics. Here are the stats for the diversified top 20... remarkable.
Below you can see all the Portfolio metrics in heavy blue versus all the individual stocks numbers. The vertical axis has been adjusted to allow an effective visualisation.
These numbers are way stronger than the original screening rules we used. If you found a share with these kinds of numbers nobody would believe you - and you can't, but we've found up to 200 of them!
Synthesising the perfect stock
So herein lies the lesson. It's not just that trying to find the perfect stock is impossible - and I'm not trying to discourage you from trying - but you may find it more helpful to focus on building the perfect portfolio instead - which is like synthesising the perfect stock.
As Ben Graham once said:
"To try to buy groups of stocks that meet some simple criterion for being undervalued - regardless of the industry and with very little attention to the individual company... my enthusiasm has been transferred from the selective to the group approach."
Buying groups of shares that meet your criteria is a better approach and is far easier than seeking individual stocks. There's also a great deal of academic research that shows that taking a ‘group’ approach ends up outperforming over time, and it's something that we've illustrated time and time again on the site. These approaches lead to strong returns as those shown from a “top 20 ranked portfolio” over the last 9 years… perhaps the kind of returns we’re all looking for from the perfect stock anyway.
Disclaimer
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54 comments
Crikey, Integrated Diagnostics Holdings (LON:IDHC) - I hold - has popped up on the screen.
On a day like today still no perfect stocks !! However if you remove the RSI rule Spectra Systems (LON:SPSY) appear !
The search is over. World Chess (LON:CHSS)
Pan African Resources (LON:PAF) now seems to qualify, I hold both this and the earlier noted Supreme (LON:SUP) but not for long enough to have had any major benefit to my portfolio. Nevertheless always good to see anything supporting my decisions.
Pan African Resources (LON:PAF) has had a good run in the last year but has broken above the top trend line which is good. Growth for the company is good too with the Mintails mine about to start production. It is all looking promising.
Top 20 Diversified NAPS - spreadsheet comparing each line with today's stock report reflects my experience with NAPS - you can't just leave it and expect a return. It needs attention and refactoring more frequently than desirable and also shows what a torrid market we have been through this last year and a half. I am referring to the link to the spreadsheet above. The article is excellent and educational.
Unfortunately, the perfect stock in the US still doesn't exist. However, if you remove the valuation criteria, I get a list of 30 names.
Although not perfect stocks, I own two stocks from the screen Booking Holdings (NSQ:BKNG) and Deckers Outdoor (NYQ:DECK).
I'm willing to sacrifice value in favor of quality and momentum. I'm sure Charlie Munger would approve. He was the original architect of buying a wonderful business at a "fair" price.
Getting some weird results on that screen when I change the rules. Remove the PE one and nothing, remove the dividend rule as well then 30 appear.
put back the PE rule and only 2 results.
I do hold some of the 30.
I should've clarified. I included the removal of the dividend yield as a valuation metric. So, you're getting the same 30 results from the screen that I did.
OK I see. That would explain it.
Although not perfect stocks, I own two stocks from the screen Booking Holdings (NSQ:BKNG) and Deckers Outdoor (NYQ:DECK).
I've held BKNG for nearly 5 years and it's been a lovely GARP share - by US standards. Certainly not a steady ride, thanks to Covid, but not stressful either, given the strength of the platform and the outstanding cash generation. I rarely bother to check the SP, which I think is a really good measure of confidence. I just wish they would do a 10:1 or even 5:1 share split. It would increase participation from retail shareholders and facilitate the trading of options. I have a position valued in six figures and still can't get halfway to selling covered calls, for which this stock would otherwise be well suited.
The perfect stock exists! Hello, Supreme (LON:SUP) , which has come up on the screen.
Great article Ed - ever thought of launching a Stockopedia ETF !!
Also posting to remind myself to return to this
Is there a way of bookmarking threads on Stockopedia - i know can bookmark in browsers but this does not help when using different computers, tablets phones etc at different times
Yes we do think about an ETF. Maybe one day.
Today there were three "perfect stocks" but when I added my usual low debt profit generating company rules then indeed no perfect company exists at this present time. I believe in time some will appear on the list just to disappear again.
Ed makes a very good point. If there was a perfect company then that is all we would ever need. But we know it doesn't exist.
There are 3 on the US market, all energy. Are energy companies perfect, no far from it, just look back to 2020. I suspect if this was run in a bull market then there would be more, many guru screens have a lack of stocks qualifying at the moment.
Just trying this screen again, nothing on UK or US markets. But if you remove the dividend rule then 4 on UK and 2 on US markets, pop up. A lot of successful companies don't pay out 2.5% dividend. Is it better to pay away tge profits or to reinvest them into the business?
"The perfect stock does not exist."
...Apart from the 3 US stocks and 2 Canadian stocks that the screen returns for me anyway :-)
Ed - the link isn't working for me? It just comes up with a long list in SR order
Fascinating article by the way
Does this link include the columns? I've edited it for me, but I'm not sure if the 'edited view' is shared via the link. https://www.stockopedia.com/sc...
Unfortunately not. I'm getting the same issue as Caulkhead. Just a long list in SR order.
There are 2 links. One is the top stocks in SR order. The other is a screen with no stocks qualifying.
This is what I get when I click on the link.
I'll chat to our team about this. It would be ideal to share a screen with the view you've edited as the default. It might need some fiddling though, as as soon as you click 'customise' you'd need a new copy of the view. So it's not standard behaviour.
Nonetheless - it's quite easy to add the columns mentioned by duplicating the screen and copying it yourself.
would be a lot better if you enabled users to set their own customised view as a their default. I.E once one has customised and saved the screen view tab it becomes their screen view for all their screens. Enables all screens to be downloaded and copied into excel the same, so when one then copies and pastes the screen to a template all other customisations or additional calculations are the same for each screen generated.
I appreciate that but we'd just end up with people complaining that screen views didn't reflect their criteria. There are of course 8 other table views you can edit. What might be good is to mark one of those as your default view instead.
Is it possible to increase the number of screens one new site. On the old site it was unlimited, I had about 100. If I want to add a new screen now I will have to delete about half of them.
Also is there any news about folios?
I already know the shares reflect my screened criteria or they wouldn’t be there. From there I may want other desirable but not essential criteria close to hand. Table views reflect exactly that. QVM etc. so the place to visit to drill down on each element. This is one enhancement that detracts from the new site and I personally being able to set one’s own default as with the old site worked better. Why not see what the community thinks. Thumbs up for Ed to vote for screen view as is or thumbs up to reverse to default custom tab as per the old site.
@Taff6 - the screen views work exactly as they did on the old site. There's a default screen view generated from your screen criteria, and you can customise it as you wish. But that customised view is specific to your screen, not shared across others.
Hi @Edward Croft, OK take your point apologies.However if you forked a screen the custom tab criteria remained the the same as in the screen you were copying. You just then had to amend the screen criteria for the new screen. custom tab remaining the same is advantageous for downloading to excel for further analysis and manipulation. Just a thought, thanks and keep up the good work.
We're working on moving our payments infrastructure to another provider at the moment, which is a frustrating area of development as it's not adding user value. It's essential though.
After that the first set of improvements will be additional portfolios and screens. I can't predict timelines, but the payments side will be going on till at least the end of August - so it's a few months away.
There is another benefit that screening by rank in market or sector or industry brings about. Let's say you want to find a company with good ROCE. But you you don't know what ROCE number to deem as a pass. eg should you set a minimum of 10% or 15%? Well you can get around this quite easily by requiring ROCE rank in market to be greater than say 67%. This means that the ROCE would be in the top third of the market. So it can often be easier and quicker to screen by rankings than to screen by absolute values.
Hi
How do you specify rank in market instead of absolute value?
I’m working on my phone and can’t see a way of setting top 1/3 off ROCE in market etc.
Hi Revs8 I only access Stocko on my Windows laptop. The way it works for me is: 1) Add a rule 2) Select metric 3) Add Advanced rule 4) Select Ranking rule 5) Select rank in market or rank in sector or rank in industry 6) Select from list that starts with Greater than 7) Insert ranking value between 0 and 100. That's it. I don't know if it's the same on a phone because I have never seen it. Rankings are percentiles. So if you want the top 25% enter 75. Or you want the top 5% enter 95. Or for the top third you would enter 67.
Thanks. I think Advanced rules can only be added as new rules. I was trying to update an existing rule in my screen.
I love the concept but, with a bit of poetic licence, this screen has me raising the Earth’s temperature with hydrocarbons (several times over), deforesting Indonesia, causing lung cancer, flogging used cars, surveilling the population, digging holes on the Russian border and profiting from the opiate epidemic. No wonder they’re all cheap!
As a lifelong business owner I believe in investing in companies you would be proud to own and to hold for a decade. I think there’s a case for re-running the screen on US and European stocks with a PER in, say, a range 12 to 18 to eliminate the sin stocks and provide a quality grouping with long legs at a reasonable price.
Unfortunately my portfolio still wouldn’t qualify because it sits higher up the quality/expensive scale - perhaps to my cost if this screen has real merit!
"I love the concept but, with a bit of poetic licence, this screen has me raising the Earth’s temperature with hydrocarbons (several times over), deforesting Indonesia, causing lung cancer, flogging used cars, surveilling the population, digging holes on the Russian border and profiting from the opiate epidemic. No wonder they’re all cheap!"
@BnB - that's perhaps the best paragraph I've read on the site in years - and a very fair pushback.
I guess this goes back to a great quote that Ed Seykota (Market Wizard) once said - "everyone gets what they want from the market". I'm really a nerd that is fascinated by what drives market beating performance and happy to ignore what companies do at the margin in the hunt for outperformance.
But we're in a world that is prioritising ethical concerns for investment (e.g. ESG) over investment returns, and I do think that these concerns have merit. I've thought for some time that we should put ESG filters on the site - but then again are BP and Amazon really ESG? The problem is that big companies do so much greenwashing to get included in ESG indexes that the metrics become rather useless.
Good old fashioned judgement works best in many ways.
Thanks Edward. For all my reservations, I did find this a very stimulating article. When I have a bit of time it’ll be interesting to reverse engineer my portfolio using filters in Sharepad to see where names rank in their sectors for key metrics, and potentially weed out the weaker performers.
…..sorry posted prematurely!!
gives me about ten uk stocks. But one way to achieve something similar to Ed’s method without going to Excel (which might put a lot of people off) would be to include a screen question saying “how many screening questions should be met?” With options for “all”, “all minus one” and “all minus two”. Worth considering?
Hi Doctor Dave. I very much agree with you about having an option to be able to screen in such a way that all questions need not be met. For example, you have 10 screening criteria and you get no results. But now you tell the screen that you would accept any nine of the ten criteria being met. You now get 2 companies passing the screen. You can see which of the original criteria were not met for each company. One company missed one of the the original criteria in a big way. The other company missed a different one of the original criteria by a very small margin, and you decide that this company is worthy of further investigation because it very nearly met your original screening criteria.
Thanks. I agree with WarrantStar. And me.
Brilliant article thanks so much. I have a screen called “Bestest!” which has about 15 good attributes rather than ideal attributes and this usually gives me up to ten uk
Hi Ed
Great article. I’ve just tried downloading the list on my phone and get taken to a screen with 0 rules (so just a list of all companies listed in SR order.
Very interesting observations.
I notice that the filter produces a couple of energy stocks when run on the Canadian market: Whitecap Resources and Alvopetro Energy. I was lucky enough to hold the first one of these, but am now researching the second!
The one that makes you money , that’s definitely the perfect stock.
Have a nice weekend everyone.
Thanks
it underlines the reasoning behind your SNAP portfolio.
Are you planning to create a screening tool that
applies a series of rules (like the ones you outlined) to the Stocko database
to select a list of length N
so the median of the shares selected meets the rules
with an appropriate spread of industry sectors
ordered by something sensible (like StockRank)
?
Quite possibly.
Also how do we apply the NAPS rule to the sheet/screen?
how do we find the top 20 you mention, do we download the excel and take the top 20 on the sheet?
Yes. A link to the spreadsheet would be useful
Apologies - I thought I'd added it. It's here.
If you remove the relative strength criteria, then you have £RWA! Liontrust certainly think it's pretty good.
removing another one gives TClarke
It leads to a (probably) unanswerable question - is
Passing all but 1 of a set of strict rules > Passing all of a set of less-strict rules
obvs it depends on the rules :)