Best Companies Screen That Beats The Market

The idea behind this was to see if I could come up with a screen that included the characteristics of a great company and backtested well.  So what are these characteristics?

1. High returns on capital.
2. High margins.
3. Consistently generate free cash flow.
4. Not too much debt.
5. Stable revenues with either growth or at worse small declines (yes even the best companies do experience periods of small declines in sales).

One problem is that these combined are very attractive and hence noticed by market participants who bid up the stock price.  Hence my final criterion is that the company must trade at a discount to the market.  This avoids overpaying.  When I backtested this screen, the 15-year performance was 12.2% annually using only stocks from the S&P 500 and 12.6% for using stocks from all over the world with a market cap of at least $1bn and traded at least $1m worth a day.  This compares well to the S&P 500 that rose 9.9% annually.  That may not seem like a huge difference but over 15 years that translates in $100k becoming $563k (US best), $590k (Global best), but only $413k for the S&P 500.

Below I’ve listed the “Best Companies” as of September 10th, 2018 as given by the model for the U.S. and Global.  I’ve sorted by market cap.  Good hunting!

United States

Global