Tag Archives: stocks

Explaining The Dugan Stock Scoring System In Detail

Many SA readers have asked me to explain the Dugan stock scoring formula. I do so in this article, in detail. After reading the detailed explanation, please provide comments and suggestions for improvements. Many SA readers have asked me to explain, in detail, the Dugan stock scoring system. I will do so in this article. First, I’ll provide an explanation. The scoring system was borne from my dissatisfaction with using filtering as a primary process to identify high-quality stocks which also met my needs and wants by having specific minimum or maximum performance criteria. Note, there are 2 primary goals when trying to identify stocks to buy: high quality AND meeting my specific needs and wants. Meeting my specific needs and wants is easily determined by filtering for them, such as: Estimated 5-year EPS growth greater than 7% MR, 1-year, 3-year and 5-year dividend increase greater than 7% Payout ratio less than 70% Relative Graham less than 70 Minimum yield of 2.3%. But that filtering doesn’t necessarily cause them to meet the “high quality” part of the goal. Please don’t get me wrong, filtering is a valuable part of the process, and will identify stocks which meet my specific criteria. But, it has 2 weaknesses: one weakness is that a stock I might otherwise prefer from a qualitatively holistic point of view could be filtered out by only a single value. For instance, I like and own Johnson & Johnson (NYSE: JNJ ) and Pfizer (NYSE: PFE ). If I filtered for 10 variables, including a yield greater than 3% and an EPS payout ratio less than 75%, both would not have made the cut because, at the end of July, JNJ’s yield was 2.99% and PFE’s p/o ratio was about 77%. They may have scored very high on all other nine of the 10 variables, and may even have been higher quality, from a balanced and holistic point of view than some stocks which made the cut, but they missed the cut because of only one of ten variables, and then only very slightly. I believe an investor will achieve better results if the investor first identifies companies which do meet some definition of high quality, and only then filters for her/his specific needs and wants. I tried to find a method of first identifying “high quality” stocks, but couldn’t find one. So, I created one that would work with David Fish’s CCC lists. I believe to make it onto the CCC lists is a quality criteria in its own right. So, I’m doubly blessed to have both the CCC lists and my own scoring system as quality filters. Some have pointed out that only using CCC limits me to 700-plus stocks in the selection universe. Since I only need about 40 stocks in my portfolio, 700 plus is big enough, plus, over time, only dealing with 700 allows me to learn and understand deeply about the stocks in the lists. That learning and understanding, I believe, gives me a leg up in expected results and provides the ultimate sleep-well-at-night portfolio. Now, to the main point of answering the question about the specifics of the formula. Here is the formula: =IF(D9> 30,”10″,IF(D9> 20,”8″,IF(D9> 10,”6″,IF(D9> 7,”4″, IF(D9> 5,”2″,0)))))+IF(L9=”n/a”,”0″,IF(L9> 20,”5″,IF(L9> 15,”4″, IF(L9> 10,”3″,IF(L9> 7,”2″,IF(L9> 5,”1″,0))))))+IF(S9> 100,”0″, IF(S9> 90,”1″,IF(S9> 80,”2″,IF(S9> 70,”3″,IF(S9> 60,”4″, IF(S9> 50,”5″,IF(S9> 40,”6″,IF(S9> 30,”7″,IF(S9> 20,”8″, IF(S9> 10,”9″,IF(S9> 0,”10″,0)))))))))))+ IF(AND(T9> =-100,T9 -30,T9 -10,T9 0,T9 15,T9 30,T9 50,T9 70,T9 20,”5″,IF(AB9> 15,”4″,IF(AB9> 10,”3″, IF(AB9> 7,”2″,IF(AB9> 3,”1″,0))))))+IF(AC9=”n/a”,”0″, IF(AC9> =30,”20″,IF(AND(AC9 =0),AC9/1.5,0)))+ IF(AE9=”n/a”,”0″,IF(AE9> 30,”20″, IF(AND(AE9 =0),AE9/1.5,0)))+IF(AF9> 100000,”10″, IF(AF9> 50000,”8″,IF(AF9> 20000,”6″,IF(AF9> 5000,”4″, IF(AF9> 1000,”2″,IF(AF9> 500,”1″,IF(AF9 20,”10″,IF(AL9> 15,”8″,IF(AL9> 10,”6″, IF(AL9> 7,”4″,IF(AL9> 5,”3″,IF(AL9> 3,”2″,0)))))))+ IF(AM9=”n/a”,”0″,IF(AM9> 20,”10″,IF(AM9> 15,”8″,IF(AM9> 10,”6″, IF(AM9> 7,”4″,IF(AM9> 5,”3″,IF(AM9> 3,”2″,0)))))))+ IF(AN9=”n/a”,”0″,IF(AN9> 20,”10″,IF(AN9> 15,”8″,IF(AN9> 10,”6″, IF(AN9> 7,”4″,IF(AN9> 5,”3″,IF(AN9> 3,”2″,0))))))) I’m sure the formula doesn’t mean much. I have summarized the revised formula in the past as: In the table below, I’ll explain the way each sub-category’s score works: I hope this explanation is satisfactory to everyone. I am interested in comments and suggestions. I would remind everyone that with a little experience, anyone can revise and use the formula in the CCC lists to reflect values which better align with their own thoughts and priorities. Happy investing. Additional disclosure: 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. (Stolen from Chuck Carnevale).

Closed End Funds: Is There An Opportunity?

Summary Closed End Funds have traded for years, yet tend to be misunderstood. There are both advantages and disadvantages to investing in CEFs. At the present time, there are a number of compelling CEF trading at deep discounts. Closed End Funds (CEFs) have been around for decades, but despite their lengthy existence they tend to be misunderstood and consequently are under-appreciated investment vehicles. In contrast to open end mutual funds, which have the freedom to issue unlimited shares at the fund’s Net Asset Value or NAV, CEFs issue a fixed number of shares. In order to provide liquidity to current and future investors, CEFs list their stock on an exchange (e.g. NYSE). CEF shares transact at a market price, which very often differs from its NAV price. The price of a CEF may be above (premium) or below (discount) its NAV. The purpose of this paper is to discuss the merits and issues associated with CEF investments and to focus the reader’s attention on the current opportunity in the space. There are a few advantages to investing in CEFs, the largest being the opportunity to buy a fund at a discount to its NAV; as the discount narrows over time, the added return can be substantial. Another advantage of CEFs is that management has dedicated capital with which to invest; there is never a concern that cash will be needed to meet unexpected redemptions in times of stress. It is well documented that redemptions from panic stricken investors at market lows have hurt open end fund returns. In contrast, investing in closed end funds requires careful monitoring of discounts as they vary constantly. Another less appealing attribute is the higher expense ratios CEF tend to charge, while in addition an investor’s trading costs should also be evaluated. Trading costs can be significant if the float or average daily volume is low. Lastly, since most CEFs employ leverage, the amount and costs associated with borrowing needs to be carefully considered. At Lynx, we have been opportunistically investing in CEFs for several years. We think it is prudent in some cases to substitute closed end funds for open ended funds and vice-versa based on the attractiveness of the discounts. During the volatile months of August and September the average discount on taxable fixed income CEFs was approximately 11.5%, compared to an average discount of 4.5% over the last 20 years. The chart below provides data from the Closed End Fund Association. Based on the data, CEFs in various categories are trading at their deepest discounts. A few examples of opportunities today follow, but we caution readers to discuss the associated risks with their financial advisors prior to investment. The first example is a CEF of preferred stocks, the John Hancock Premium Dividend Fund (NYSE: PDT ). Unlike most preferred stock funds, the John Hancock team’s specialty is utility companies. As of October 11, 2015, the fund had a distribution yield 8.2%, was 33.5% levered and traded at an 11.3% discount (PDT Premium/Discount chart). Another example is the Blackrock Corp High Yield Fund (NYSE: HYT ). This fund is actively managed by the Blackrock team and invests in high yield bonds and bank loans. As of October 11, 2015, HYT was trading at a 13.7% discount (HYT Premium/Discount chart) and had a distribution yield of 8.2%, with 30% leverage. (click to enlarge) *Data: Lipper, A Thomson Reuters Company; Chart: Lynx Investment Advisory PDT Discount/Premium Over 5 Years (click to enlarge) HYT Premium/Discount Over 5 Years (click to enlarge) * Charts: CEFConnect.com In summary, CEFs have their merits and limitations. At times, CEFs can be bought for deep discounts that ultimately can boost investor returns. In our opinion, the current environment is offering many closed end funds at record discounts. Therefore, in our opinion, many CEFs offer a compelling opportunity in the current market environment.