I really like Finbox (https://finbox.com/ ), a service that values stocks using the discounted cash flow methodology applied against the average of equity research analysts' financial forecasts (e.g., revenues, earnings). Finbox also has a very good stock screener, enabling you to create a screen based on almost any criterion of your choice. Below is a screen that I've developed for stocks traded in the US equity markets:
The "Fair Value Upside" is based on a discounted cash flow analysis. That is, the difference between the current stock price and the valuation of the stock. A fair question is why I chose to add criterion beyond the "Fair Value Upside". Shouldn't the "Fair Value Upside" capture everything?
The reason for doing so is that equity research analysts usually lag the market. Meaning, relative to stock price action, analysts usually wait too long to downgrade or upgrade stock forecasts. The additional criteria are based on trailing twelve months actuals and represent the financial strength and followership of the company. Stocks with market capitalization of > $10 billion are widely held, well covered by analysts, and very liquid. A gross margin of greater than 60% is indicative of pricing power, or, in the case of commodities, a favorable upswing in demand-supply dynamics. A revenue growth forecast of greater than 10% is often indicative of secular trends that favor the company. And, finally, healthy free cash flows, are indicative of a strong balance sheet.
Based on this screen, here are the best stock picks by sector as of close of day, July 7, 2022:
A key question is that can a stock portfolio made up of just the above seven stocks outperform the S&P 500 index over the next 12 months? Well let's find out. As of close of day July 7, the S&P 500 stood at 3,903. This is where these seven stocks stood as of close of day July 7, 2022:
Let's choose close of day July 7, 2023, as the end of the test period. A year from now I'll compare total shareholder returns (comprised of capital gains and dividends). And we'll see whether this portfolio of seven stocks outperforms the S&P 500. I will add that in any given year, seventy to eighty percent of professional stock pickers underperform the S&P 500. Hence, the bar here is pretty high. To be continued on July 7, 2023.
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