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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Serie: Little Books. Big Profits
- Sprache: Englisch
How well does it pay to own the Standard & Poor's 500 Index's best-performing stock of the year? Over the 2012-2021 period, the one-year total return ranged from 80% to 743%. This book identifies the quantitative and qualitative traits of stocks that made it to #1 and tells the stories of how they got there. A key indicator, the Fridson-Lee Statistic, makes its debut in these pages. Aiming for the massive upside of the #1 stocks entails substantial risk. It's not something to do with more than a small percentage of your portfolio. But attempting to pick the coming year's top performer can provide an outlet for speculative impulses that might otherwise spoil a prudent, long-term investment plan. And by investigating the statistically determined best candidates for #1, you'll gain important insights into stock selection. The Little Book of Picking Top Stocks explains why conventional equity research provides only limited help in zeroing in on the index's future top performer. Spotting the #1 stock isn't Wall Street analysts' focus, although the information they furnish about companies' competitive strategies is quite helpful. Problematically, investment banks' fundamental stock reports are structured around a valuation metric that was discredited nearly half a century ago--earnings per share. Author Martin Fridson's previous writings on the stock market include the books It Was a Very Good Year and Investment Illusions, as well as articles such as "Ben Graham's Value Approach: Can It Still Work?" He has received the CFA Society of New York's Ben Graham Award and has been named the Financial Management Association International's Financial Executive of the Year. The Green Magazine called his Financial Statement Analysis (co-authored with Fernando Alvarez) "one of the most useful investment books ever."
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Veröffentlichungsjahr: 2023
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Table of Contents
Cover
Title Page
Copyright
Dedication
Foreword
Preface
Plan of Attack
Notes
Acknowledgments
Chapter One: Forget About Conventional Analysis
From Earnings Forecasts to Recommendations
The Irrelevance of EPS
EPS: Flawed but Dominant
EPS versus Underlying Reality
Hooray! There's Less Accounting Fraud Than There Used to Be
Earnings versus Value Creation
Bottom Line on the Supposed Bottom Line
The Guidance Game
Making Nice to Management
Deviating from the Script
Potholes in the Road Paved with EPS
It Doesn't All Even Out in the End
Breaking Out of EPS/Guidance Prison
Final Thoughts on Fundamental Analysis
As for Technical Analysis …
Notes
Chapter Two: These Are Their Stories
2017: NRG Energy (NRG) 134%
2018: Advanced Micro Devices (AMD) 80%
2019: Advanced Micro Devices (AMD) 148%
2020: Tesla (TSLA) 743%
Company Fundamentals
Analysts' Actions
Price Volatility
Credit Quality Improvement
Joining the S&P 500
Milestones
Elon Musk's Unique Leadership Style
2021: Devon Energy (DVN) +196%
Notes
Chapter Three: News Flash! There Are More Than 500 Stocks
2017: SolarEdge Technologies (SEDG) 203%
2018: Etsy (ETSY) 133%
2019: Enphase Energy (ENPH) 452%
Chapter Four: Tip‐Offs to Top Stocks
Statistics‐Based Selection
Rejected Statistical Selection Methods
Qualitative Considerations
Postscript to a Very Bad Year
Notes
Chapter Five: Begin Your Assault on the Summit!
Glossary
About the Author
Index
End User License Agreement
List of Tables
Preface
Table P.1 #1 S&P 500 Stocks—2012–2021
Chapter 4
Table 4.1 Fridson‐Lee Statistic (%)
Table 4.2 Ratios for Use in Spotting Improving Credit Trends
Chapter 5
Table 5.1 Statistical Profile of the #1 Stocks of 2012–2021
List of Illustrations
Chapter 1
Figure 1.1 Amazon Historical Market Cap and Net Income
Chapter 4
Figure 4.1 Previous Year #1 versus #250 Stock Volatility
Figure 4.2 Company Credit Ratings at Start of #1 Year (2012–2021), Moody's...
Figure 4.3 Company Credit Ratings at Start of #1 Year (2012–2021), Standard ...
Figure 4.4 #1 Stock's Market Capitalization vs. Previous Year's #250
Guide
Cover Page
Title Page
Copyright
Dedication
Foreword
Preface
Acknowledgments
Table of Contents
Begin Reading
Glossary
About the Author
Index
Wiley End User License Agreement
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How to Spot the Hidden Gems
Martin S. Fridson
Copyright © 2023 by Martin S. Fridson. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per‐copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750‐8400, fax (978) 750‐4470, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748‐6011, fax (201) 748‐6008, or online at http://www.wiley.com/go/permission.
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Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Further, readers should be aware that websites listed in this work may have changed or disappeared between when this work was written and when it is read. Neither the publisher nor authors shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.
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Library of Congress Cataloging‐in‐Publication Data is Available:
ISBN 9781394176618 (Hardback)
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Cover Design and Image: Wiley
This book is dedicated to my brother Howard Fridson, who has set an outstanding example by helping friends and loved ones through life’s challenges.
Foreword
Marty Fridson is a Renaissance man, a rarity on Wall Street.
He's a brilliant investor, a historian (of more than just capital markets), and a music aficionado. He has a wit that's wicked, especially for wordplay. He's also a source of inspiration to many, particularly me.
Our careers overlap almost to the day; our trajectories diverged almost immediately; but over the decades, we've had a few memorable points of intersection. I started at Drexel Burnham; Marty at Mitchell Hutchins. I took the equity path; Marty focused on fixed income. I soon went entrepreneurial; Marty made an impressive set of rounds at a number of top‐flight firms. I was once dubbed “Wall Street's Clipping Service”; Marty became “the Dean of the High‐Yield Market.” We became friends decades ago through our work at the CFA Institute (née AIMR).
From the CFA Institute to the Financial Analysts Journal, Marty's contributions to the investment profession are significant. Many authors live in fear of Marty in his role as a reviewer on the Enterprising Investor blog. They live in particular fear of his last paragraph because it usually reveals the errors he's discovered in their work—facts, language, historical context … yikes! They don't complain; they know that, as an author/editor himself of a dozen important titles, he's earned the right to critique. (It's impressive that the likes of Peter Bernstein and Jack Bogle thanked him for his corrections!)
When Marty writes, he brings his Renaissance self to his work regardless of the topic. His investment thesis is always accompanied by a rich lesson in market history. As an added benefit to the reader, he can never resist layering in an orchestra of musical references based on his innate love of music and the immersion his wife, Elaine Sisman, provides as professor of music at Columbia.
Ultimately, Marty writes as an investor. As chief investment officer of Lehmann Livian Fridson Advisors, he describes his investment approach as “quantamental.” For the uninitiated, a quantamentalist is the Holy Grail of Wall Street—someone who knows numbers and combines them with fundamental analysis. In what he delivers to his reader, Marty goes well beyond the numbers. He combines the insights of a seasoned security analyst with the computational precision of a fixed‐income investor. The best illustration of his brilliant alchemy, in its fifth edition, is Financial Statement Analysis: A Practitioner's Guide.
The latest tour de force of the dean of the high‐yield market is a title that might surprise—The Little Book of Picking Top Stocks. In fact, a high‐yield bond investor like Marty has the strength of experience in fundamentals and number‐crunching to offer important qualitative and quantitative insights. Although the title may remind you of other investment books you've read, like Marty it is one of a kind—insightful, informative, and provocative—with the added advantage of being right!
The path of my investment career is better for the times it crossed with Marty's. As an investor and a lifelong student of the market, I'm better off for the richness of his writing. In The Little Book of Picking Top Stocks, the polymath Martin Fridson shares the wealth with all of us.
Theodore R. Aronson
Co‐founder, AJO Vista
Former chairman, CFA Institute
Preface
Brace yourself. you're about to see the stock market from a radically new angle. The focus of this book is figuring out which stock is going to be the year's single best performer in the S&P 500 Index. In the period studied here, those stocks have produced one‐year total returns ranging from 80% to 743%.
You've read the standard investment approach lots of times. Financial institutions and personal wealth advisors present familiar themes: “Focus on the long term. Diversify. Stick to high‐quality companies with dependable earnings and proven management.” These are wise words, well worth heeding if you hope for a secure financial future.
But let's face it. Those prudent principles don't even vaguely describe the actions of certain investors. A nontrivial percentage of people who buy stocks are shooting for a monster payday. Not between now and retirement in 40 years but immediately. Or sooner. They have zero interest in “hitting a lot of singles.” They're swinging for a grand slam, game over, right this very inning.
The instant gratification style of investing made headlines on the business page and beyond in 2021. Hordes of market newcomers became obsessed with meme stocks. The shares of a few companies with a ton of social media buzz went to the moon—and back, in some cases.
Meme fans weren't thinking about funding their retirement or their yet unborn kids' college education. Fundamental analysis played no part in their “stonk”‐picking. Some of these plungers even boasted that they knew absolutely nothing about the companies they were throwing money at. Nor did they care one iota about spreading risk. One influencer advised: When you decide on a YOLO (you only live once) trade, put 98% to 100% of your portfolio in it.1
Aiming for one colossal win isn't a new idea. In every market boom of the past few centuries, sudden and spectacular wealth creation dazzled people who'd never previously paid much attention to stock quotes. It's in the nature of news reporting that a story about a stock that went up by 1,000% attracts more eyeballs than one about an index that rose by 50%. Based on that sort of emphasis, many novice investors conclude that they can strike it rich by putting all of their modest savings into the next company that will fly off the charts. The only remaining detail is identifying that company.
This mindset sounds hopelessly naïve to longtime investors, who have seen countless past highfliers suddenly crash to earth. But the idea that some company will pay off in a huge and lasting way is not only plausible, but almost inevitable. Every so often, a spectacular technological breakthrough creates the potential for astronomical earnings growth at companies that successfully commercialize it.
In an earlier generation, “finding the next Xerox” was the aspiration of working stiffs with a dollar and a dream of joining the ranks of the idle rich. Xerox's patented photocopying process revolutionized office work. Its share price rose 15‐fold from mid‐1961, when Xerox listed on the New York Stock Exchange, through mid‐1965. Even that gain paled next to the stock's appreciation during its pre‐NYSE days. All told, from its 1949 low point to its all‐time high in 1999, XRX's price increased 4,500‐fold.
Many more superstar stocks have come down the pike since then. Reaping huge trading profits didn't always require patience. For example, Cisco's shares gained 195% in 1991. In 1999, Oracle's stock price advanced by 289%. In 1998, Amazon shares appreciated by a mind‐boggling 967%.
Neither were sensational short‐run price surges restricted to the high‐tech sector. Tractor Supply shot up by 301% in 2001. Three years later, Monster Beverage racked up a one‐year gain of 332%.
When I first started devoting $50 out of every paycheck to investing in stocks, I wasn't counting on such spectacular one‐shot results. My business school education, my training as a trader, and my studies toward obtaining the Chartered Financial Analyst designation all emphasized grinding out steady but modest gains by closely studying a number of different securities.
Then, around 1983, I gained an insight into the bolder approach. At the time, I was serving as my alumni club's vice president for programs. I scheduled a presentation by a financial advisor who laid out a thoughtful plan for patiently building net worth over a lifetime. The key elements included diligently saving money, dollar‐averaging into the market, limiting year‐to‐year swings by owning a balanced portfolio, and being conscious of taxes on income and capital gains.
At the conclusion, one club member expressed utter contempt for what he'd heard. “This sort of thing won't enable you to change your lifestyle,” he sneered. To do that, he made clear to me, the attendees would have to invest in more speculative, private investments. He just so happened to deal in that sort of thing professionally.
That thumbs‐down review of my speaker selection didn't trigger any radical change in my investment approach. In my personal investing and later, as a professional money manager, I continued to rely on a time‐tested principle: Build your wealth over the long haul by owning a piece of the growing global economy.
The evidence is clear: By avoiding the mirage of trying to time the market and by staying away from fads, it's possible to accumulate a hefty nest egg for retirement. How big that nest egg will be depends largely on how much income you save and invest, year in and year out. If astute stock picks make that wealth grow at a somewhat higher rate than the market averages, so much the better.
But my fellow alum's concept of making a big enough bundle to fund a lifestyle change drove home an essential point: The security‐minded middle‐income couples portrayed on brokerage house and investment firms' commercials constitute only a portion of the investing public. A significant minority fantasizes about fifty‐million‐dollar houses and five‐hundred‐thousand‐dollar cars. Immediately, if you please. Those speculators' hopes are smashed to smithereens every time the market pulls back from a delirious top. But come the next astronomic rise, another generation of newbies is there to chase the same get‐rich‐quick dream. And even some who got burned the last time around are convinced they'll make it work this time.
This is an aspect of human behavior that extends beyond stock market manias such as the 1990s dotcom frenzy. When home prices boomed in the 2000s, the dream of homeownership morphed into swiftly parlaying a small stake into a fortune in residential real estate. If this sounds about as feasible as becoming a centimillionaire by employing a “system” to beat the horseracing oddsmakers, that's no coincidence.
Think of the common phrase, “playing the market.” That one was around long before self‐appointed defenders of the public welfare began decrying the “gamification of investing.” Concentrating your entire portfolio in a single stock, expecting that it will hit paydirt and change your lifestyle, doesn't differ in any important way from betting all your chips on a number on the roulette wheel. Federal Reserve Chairman Alan Greenspan had good reason, in 1999, to liken buying a red‐hot Internet stock to hoping to hit the one‐in‐a‐million lottery jackpot.
On the other hand, not all of those bettors you see in a casino are putting their lifesavings on the line. Many just find it entertaining to play blackjack or feed money into a slot machine for a few hours. They realize it'll probably cost them a couple of hundred bucks, but there's always a chance they'll get lucky.
The point is that not everybody is truly risk‐averse, as financial textbooks generally assume. Some people get psychic pleasure from taking a chance. It's especially enticing if there's an intellectual challenge involved. When it comes to financial risk, the challenge is to find a way to channel the thrill‐seeking into a harmless sort of activity. “Harmless” in this context means, “In the worst case, it's not going to cost you more than you might spend on some other form of excitement.”
No less an authority than Wharton professor emeritus of finance Jeremy Siegel has said of the meme stocks, “I always recommend to young people, if you want to play with 10% or 15% of your portfolio in those games, fine. But, put the other 85% into some sort of an indexed long‐term fund.”2 In my judgment, 10% or 15% is much more than is necessary to satisfy the speculative urge. Neither are index funds the only responsible choice for the remaining 98% or 99%. But Siegel's comment acknowledges the reality that investors aren't emotionless automatons with computers for brains, as a lot of financial research depicts them.
No matter how many studies our universities pump out to demonstrate the improbability of outwitting the supposedly perfect equity market, some investors are going to have an occasional fling with a stock that just might turn out to be the Big One. If they're wise, they'll subdue any urge to bet the farm on the proposition. The question then becomes, how should they go about trying to identify that killer stock?
You're unlikely to find a satisfying answer in Wall Street research. Sure, the analysts who write those reports are generally very bright. They're extremely knowledgeable about the industries they follow. But what use are they putting that all that IQ and knowledge to?
Their primary job is helping institutional clients beat the market average. Those portfolio managers don't have to beat it by a lot. A portfolio manager who consistently finishes in the top half of all managers every year will wind up in the top 25%. Sustained outperformance of this kind brings in additional dollars to manage, whether from pension plans, endowments, high‐net‐worth individuals, or mutual fund customers. Amassing more assets under management means more fee income.
The organizations competing in this system aren't about to risk their money machines on a single stock that might soar into the stratosphere, but could also go into a nosedive. Professional money managers perk up when a Wall Street analyst upgrades a stock from “Market Perform” to “Outperform” or boosts the price target by 10%. They're not looking for a “King of All Stocks” recommendation. They spread their risk over a lot of different stocks. Ideally, those stocks' returns will average out to something greater than the index's return. But what they need to avoid at all costs is getting so deep in a hole that it'll take them years to get back to even with the market.
So if you've set your sights on picking the #1 stock, conventional research reports will be useful only in a limited, specialized way. They'll help you get the operating lowdown on companies that you've already identified as candidates for the #1 slot. The first step, before you start digging into research reports, is to figure out which stocks most resemble the ones that topped the performance tables in the past. That's not a priority for stock analysis, but it's the primary focus of The Little Book of Picking Top Stocks.
To be clear: This book isn't designed to push readers into swinging for the fences, if they aren't already inclined to. I'm telling, not selling. But by learning about the very best‐performing stocks, you'll gain insights into market dynamics that will make you a better investor.
In fact, if you belong to an investment club, or simply enjoy talking about stocks with your friends, here's an idea to try out: Toward the end of each year, have everyone name the S&P 500 stock they expect to be the coming year's top performer. Let everybody put a few dollars in a kitty, with the prize winner receiving a gift certificate or dinner at a nice restaurant. Participants can also buy a few shares of their nominated stocks if they wish.
Judging by historical experience, you'll still do pretty well if your pick comes in only #5 for the year or even #50. But your biggest benefit will come from doing the research. Going about it in a systematic way, based on what you'll learn in the following pages, will sharpen your skills for the more important task of creating a portfolio that's both responsible and profitable.
Plan of Attack
As experienced anglers will tell you, if you want to catch a fish, you have to go where the fish are. If your objective is to find next year's numero uno, don't waste time on stocks that are unlike any stock that's ever topped the total return table. The trick is to eliminate as many stocks from consideration as possible. Narrowing the list to a handful of candidates won't guarantee that you'll select the ultimate winner, but it will improve your odds tremendously.
I'll start by describing the pitfalls of relying primarily on conventional equity research when you're trying to land the stock market equivalent of a thousand‐pound marlin. Then I'll tell the stories of past #1 stocks. Next, I'll describe several quantitative screens that can help you separate the minnows from the sharks. I'll also dispose of some logical‐sounding selection techniques that can only put you off the track. And I'll isolate the qualitative characteristics that have distinguished top stocks of the past. I'll focus primarily on the stocks listed in Table P.1 and particularly on the leaders of the last five years shown.
The result of this painstaking study won't be a simple quantitative formula that's guaranteed to pick the #1 stock every year. If such a formula could be found, every investor would use it. By crowding into that targeted stock, they'd drive up its start‐of‐the‐year price to a level that would leave only a mediocre potential for further gains. But by applying a mixture of quantitative criteria and qualitative factors that the market leaders have in common, you'll be fishing in a very select spot where the biggest fish are usually found.
Table P.1#1 S&P 500 Stocks—2012–2021
Year
Stock
Return %
2012
PULTEGROUP INC.
188
2013
NETFLIX INC.
298
2014
SOUTHWEST AIRLINES CO.
126
2015
NETFLIX INC.
134
2016
NVIDIA CORP.
227
2017
NRG ENERGY INC.
134
2018
ADVANCED MICRO DEVICES
80
2019
ADVANCED MICRO DEVICES
148
2020
TESLA INC.
743
2021
DEVON ENERGY CORP.
196
Source: Bloomberg.
Don't interpret “qualitative factors” to mean vague, squishy characteristics. A while back, a professor of technology and innovation at one of the world's highest‐ranked business schools told me about a company that had caught his attention. He said it satisfied every one of his carefully defined criteria for spotting enterprises that were likely to succeed in a big way. I bought the stock, and it wound up being not only the S&P 500's #1 performer that year, but also the top performer among all #1 stocks in this book's 10‐year study period. The company was Tesla and its shares gained 743% in 2020.
You shouldn't count on raking in that sort of profit every time you set out to find a top stock. And as I've already noted, it's not a good idea to funnel a large percentage of your wealth into just one stock with the expectation of making enough in the space of 12 months to retire for life. But neither do you need to pick a name out of a hat and hope for a miracle. If finding the way to #1 intrigues you, you can attempt it in a calculating, evidence‐based way. Read on to learn how.
Martin Fridson owns shares of Tesla Inc. No comment in this book should be construed as a recommendation of, or opinion regarding the future performance of, any security mentioned herein. Opinions expressed herein are the author’s and do not represent the views of Lehmann Livian Fridson Advisors LLC.
Notes
1.
Erin Gobler. “Stonks, Apes, YOLO: Your Guide to Meme Stock Trading Slang.” The Balance. Updated 19 June 2022. Online version
https://www.thebalancemoney.com/your-guide-to-meme-stock-trading-slang-5216722
2.
Vildana Hajiric and Michael P. Regan. “Jeremy Siegel Says It's OK to ‘Gamble’ on Speculative Stocks.” Bloomberg News. 28 August 2022. Online version
https://www.thewealthadvisor.com/article/jeremy-siegel-says-its-ok-gamble-speculative-stocks
Acknowledgments
This book would not have become a reality without John Lee's devotion to tracking down and testing voluminous data. I am grateful to Bill Falloon and Purvi Patel of John Wiley & Sons for their roles in getting the project approved and seeing it through to the finished product. My thanks as well to Fernando Alvarez, Peter Ernster, Steven Miller, Barry Nelson, Megan Neuberger, Daniel Partlow, Eric Rosenthal, Dominique Terris, and the dedicated staff of the Baker Library at Harvard Business School for helping to make the book as good as it could be. Above all, Elaine Sisman has earned my deepest gratitude for her unwavering encouragement and advice.
Chapter OneForget About Conventional Analysis
Seeking a professional's opinion makes sense in lots of situations. Say you're about to agree to buy a house. If you don't happen to be an engineer who specializes in judging structural soundness and safety, it might be a good idea to hire someone with that expertise to look the place over. Or suppose you can afford a painting by a famous artist to hang on a wall in that house, but you don't know the art market well. You'd be wise to pay a consultant who can tell you where comparable works sell at auction.
It might seem to follow that if you're trying to pick next year's #1 stock, you'd want to look for it in research produced by people who analyze stocks for a living. Equity analysts employed at Wall Street firms or independent research organizations know the companies they follow inside out, thanks to specializing by industry and concentrating on a small number of stocks. Over many years of studying their industries, they've developed valuable contacts at their companies' suppliers and customers.
As a result, analysts often know what's happening on the ground before it shows up in earnings reports or newspaper articles. What's more, these stock evaluators process vast amounts of data. That complements the judgment they've developed through lengthy experience. Most Wall Street equity analysts are also extremely bright. And you can learn exactly which of these brainy and highly motivated analysts are considered the best in their field, thanks to annual surveys and scorekeeping by various organizations, most famously by Institutional Investor.
Despite those assurances, do you want to run the top analysts' top picks through one more battery of tests? No problem. Their recommendations, which are based on “fundamental” factors such as companies' competitive strength and earnings prospects, are complemented by “technical” analysis that's conducted by a separate group of highly intelligent professionals. Also known as “chartists,” they make predictions about stocks' future movements based on statistical relationships between price trends from one period to the next.
No doubt about it, there's a lot of intellectual firepower for you to draw on as you attempt to identify the year's highest‐return stock before it takes off for the moon. The question is whether any of it is useful in that quest. I'm not disputing the value of the skills that enable premier analysts to command big‐time compensation packages. It's just that the system they're part of isn't geared toward the objective that's the focus of this book.
From Earnings Forecasts to Recommendations
A typical Wall Street equity research department includes specialized analysts covering a wide array of industries—high‐tech, low‐tech, financials, commodities producers, consumer goods, business‐to‐business, and more. The competitive dynamics of those industries vary tremendously, but the analysts boil their work down to a uniform, easy‐to‐understand set of acronyms.
Each analyst projects the company's earnings for the coming year and divides that amount by number of shares
