VRTX - My Methods To Finding The Best Stock Portfolio

2023-05-04 03:08:32 ET

Summary

• My journey on the road to finding the best portfolio.
• My early attempts to find the best stocks in which to invest.
• My success in finding the best methods.

I feel it is about time to publish my latest stock recommendations as I have, I think, successfully determined the best method for finding good candidates. This process has taken about 10 years so far of fairly intense research and effort to develop this system but I think that I have finally developed a satisfying, nearly optimized result.

Back in 1994, I read a book by the hedge fund manager Mark Boucher called "The Hedge Fund Edge". I was very impressed, to say the least. In that book, he refers to a study that told of a contest between Mr. Timing and Mr. Selection. Mr. Timing was prescient and picked the best day of the year to buy the S&P and sold on the best possible day that year. Mr. Selection, on the other hand, bought the very best stock for the year on January 2nd and sold on the last trading day of the year. As it turned out, Mr. Selection outperformed Mr. Timing by many times.

With this information, I then embarked on a quest to find the very best stocks. I found that there are many good systems that very smart people have developed over the last hundred and forty years, starting with Charles Dow of Dow Jones fame, who started out with a newsletter that later became the Wall Street Journal. Many others followed that made very good contributions, many of which we still promote today.

Being a technician, I spent much of my time developing systems for timing, many of which I still think are still excellent. I reviewed some of the systems over the past year or so and realized how good they are. I wish I had not gone on to try other ones. But I never stopped trying to seek the best stock selections and looked to the Gurus to tell me what to buy, figuring that they are much more capable of finding the best ones than I.

About 10 years ago I decided to get serious about stock selection and reviewed many of the better, more respected systems and gurus. I decided to divide my portfolio into four segments: Aggressive, Defensive, Stable, and Bonds (using ETFs and funds).

I searched Google for the top stocks in each category and put them into a spreadsheet. I then ranked them by certain criteria. Each stock had to be large cap, have a long history, outperformed the S&P 500 in 4 time-frames, and be the top performers in their category. Knowing that I tend to take on too much risk, I limited the Aggressive stocks to 4, and chose 6 stable, and 7 Defensive. I also chose 3 bond ETFs to round it out. Following this group, I replaced a stock if needed (if it had problems) with the best I could find in their category. Fortunately, I didn't need to do this very often, maybe once a year or so.

The stocks I chose were these:

Aggressive: [[ALGN]], [[AMD]], [[NVDA]]

Stable: [[CDNS]], [[AAPL]], [[PWR]], [[SPXL]], [[NSP]], [[VRSN]]

Defensive: [[WMT]], [[LOW]], [[CNC]], [[V]], [[MCD]], [[COST]], [[LLY]]

I still follow this portfolio and it has easily outperformed the S&P. While the S&P rose 10.7% annually since Jan 2, 2013, this portfolio rose at a rate of 21.9%, over double. After reviewing the various bond funds and ETFs, I rejected all of them as they followed the S&P quite closely and thus were redundant.

I then decided to optimize the portfolio for smaller investors. After some time studying the benefits of smaller portfolios, I determined that the best number of stocks to hold seems to be 5-7, depending on what stocks are held. Even for very large capital portfolios like Warren Buffet's, smaller Is better. I looked at his holdings and he has (at present), about 90% of his money tied up in 12 stocks, though he has a couple of hundred different issues total.

I then took my best portfolio and whittled it down to 6. I called this one "Consistent". It consists of the following stocks: AMD, NVDA, AAPL, LLY, CDNS, and SPXL. I know that SPXL is not a stock but an ETF, but it is so consistent and reliable that I felt that it was worth adding. This portfolio has returned 34.5% annually for the same time period, even better.

I sat on this until I got the bug again to optimize and went all out about a year ago. I again looked at many systems of stock selection out there and discovered over 20 good ones. Figuring that these are probably the best ones possible, I decided to compare them with each other and see what happens.

I looked at the various options and decided on a group that I kept seeing referred to over the years. Some I rejected because they just didn't compare well against the others. Some are systems developed by top traders and a couple are merely great picks from analysts on Seeking Alpha, which I picked recently. I was surprised to see that there is very little overlap in the stocks chosen by the various systems. I revised this portfolio several times and though the earlier ones are still very good, I think my latest one is the most outstanding. I call it the "New High-Profit System" (or NHP) and is at version 6. The first 5 consist of 5 stocks each but the most recent version has expanded to 9. Even though this is the case, I have a longer list of 15 that could be used for larger capital accounts.

I decided that going back too far was not as important this time as each time the market declines and then rallies, new issues would stand out, so I only tested back to October 3, 2022, the latest major bottom. I also decided to avoid "Shooting Stars" type stocks that are flat and shoot up suddenly to make it seem like a good buy, only to crash shortly thereafter. The result is that the chart shows a very consistent trend. The systems are value-oriented rather than technically oriented (except for the weighted Alpha group which is purely technical) giving me a fundamentally weighted group to begin my analysis.

I compared the following systems:

1. My Consistent Portfolio
2. My NHP5
3. Seeking Alpha top 10 recommendations
4. The Top 10 stocks ranked by a weighted Alpha
5. The Graham System
6. The Best Piotroski System
7. The AI picks recently made on SA
8. The "FAANG's"
9. Recommended Portfolio by Fred Piard
10. Recommended 5 stocks by Stephen Cress
11. Mark Boucher's top 10 Recommendations (PSL newsletter)
12. Hedge Fund Top 10 stock positions

I also looked at stocks picked by Warren Buffett but he seems to be investing for safety rather than return. All in all, I formed a list of 72 stocks, and then ranked all the stocks by Annual percent return using Excel, and then adjusted my NHP5 to create NHP6.

My NHP6 with 15 stocks has returned 602.5% annually since October (as of May 1st). The subset of 9 stocks returned 802%. Be aware that the number one stock ( VRTX ) returned 3719% which exaggerates the overall result quite a bit. Without this stock, the portfolio returned 514%. I am very happy with it at this point. My intent is to review weekly and adjust as necessary, but the return has been very consistent over the timeframe. See the chart below showing a comparison of the various portfolios. I encourage the reader to verify my results.

The following stocks are my NHP6 Portfolio selections:

VRTX, ADRX, CBAY, JBL, ETNB, MLTX, ELF, ASRT, NVDA, TERN, TDW, ACLS, SMCI, EDU, and SHOP.

As I said, these 15 stocks (shown in order) are my base picks, the top 9 being my preferred portfolio. I will continue to monitor and revise this list should one or more of these stocks show weakness or fall below the top 20 on my overall list. It is heavily weighted with Health care so when this sector cools down, I would expect to revise the portfolio accordingly.

Recommendations

It is my firm belief that these stocks will outperform the entire market (as a group) for the foreseeable future, and I'm comfortable recommending them. The top performer, VKTX, is the star of the show but as we know, these stars tend to peter out so watch it carefully.

Shown below is a chart showing each of the portfolios since October 2022. The S&P 500 is shown in red for reference.

Conclusions

I believe that my selection of stocks described in this article is the best one available at this time. On the other hand, this is not a "buy and forget" portfolio and should be reviewed at least on a weekly basis as the market is fickle and some of the best stocks today could go out of favor. However, I see these as being valid for the foreseeable future. Revisions do not happen often, but stock selections should be monitored regularly. Even the best stocks tend to rotate out eventually.

I was shocked to see that the hedge fund manager's picks were so low on the results list. One would have thought that they would do so much better than they did. Their portfolio almost failed to beat the S&P. Their stock selection tends to follow the S&P with little variation as shown below, so I would reject their stock selections in my core portfolio.

The top 10 picks determined by "Seeking Alpha" performed excellently, much better than my own original Portfolios. This says a lot about them. Their portfolio returned 154.4% on an annualized basis over this timeframe. I would feel very comfortable buying their top recommendations sight unseen.

It is interesting to note that the Artificial Intelligence picks reported recently in Seeking Alpha did quite well over this period. Realizing that the picks were intended to be future-oriented, nevertheless, they performed quite well during the period I analyzed. The selection returned 72.9% (annualized) in comparison to the S&P return of 23.96%.

When adding funds to the portfolio, I would recommend doing a Rate of Change for the last 12 weeks on each stock in the portfolio and buying the highest value. I find this the best way to add to an existing portfolio. I would also recommend that one keep a maximum allocation to any one stock under 35%. This can happen if one stock outshines the others over a long period.

The last thing I need to mention is that the portfolio should be weighted near the top of the list rather than evenly over the whole group. For instance, the top 3 could be 15% and the bottom three could be 5%, the remaining divided between each of the remaining stocks. This is not unprecedented by any means as most managers do this already.

For further details see: