No. of Recommendations: 9
Labadal wrote:
I sort of remember the screen being ROE-based in the medical device industry, perhaps including other medical-related industries.This sounds like a merge of two separate mungofitch ideas. One idea is using a high ROE criteria to pick from all stocks. A second idea is Medical Devices, maybe sorted by sales growth or cash.
mungofitch wrote:
A couple of my suggestions would be a collection with unusually high ROE, which is simplest. Or a collection of stocks in industries with unusually good long run economics, like medical devices. https://yorickm.com/Message.php?pid=35126464mungofitch wrote:
Industry either MEDICINV "Medical Supplies Invasive" or MEDICNON "Medical Supplies Non Invasive" Then pick a final sort. Two suggestions were highest 5 year sales growth rate, or highest cash-to-market-cap ratio. https://yorickm.com/Message.php?pid=35126464mungofitch is not a fan of the medical device ETFs (because of poor weighting), but here they are:
Symbol 3 Year 5 Year ETF Name
IHI 5.12% 2.75% iShares U.S. Medical Devices ETF
MDEV 2.73% N/A First Trust Indxx Medical Devices ETF
XHE -1.63% -5.72% State Street SPDR S&P Health Care Equipment ETF
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Some past posts:
Author: mungofitch
Subject: A simple industry screen
Date: 9/1/2020
"... Medical devices have remained a long term good bet. I still use the Value Line database, so I`ll use their 100-industry classification. In mid 2011, Value Line split their medical supplies industry ("MEDSUPPL" or 8060) in two, invasive ("MEDICINV" or 8060) and non-invasive ("MEDICNON", not sure the number). From 2011 to August this year, an equally weighted portfolio of those two industries has beat the S&P 500 by a quite remarkable 4.7%/year before friction. It beat the S&P in all of the individual calendar years 2012-2019, and year to date. That`s an average of just under 60 stocks, close to half in each industry. If you stick to the 20 stocks with the highest sales growth, it gets better. ..."
https://yorickm.com/Message.php?pid=34606949Author: mungofitch
Subject: Re: OT bond funds
Date: 6/11/2022
"... Actually I said nice things about investing in the stocks, not the ETF. Most ETFs are cap weighted = bad. Two reasons: too concentrated to do well (cap weight is bad), and in this case heavily concentrated in more diversified firms that aren`t as purely medical devices/supplies. See post 278840 What I tested and recommended was a classic MI screen (so not off topic!) Value Line set Industry either MEDICINV "Medical Supplies Invasive" or MEDICNON "Medical Supplies Non Invasive" Then pick a final sort. Two suggestions were highest 5 year sales growth rate, or highest cash-to-market-cap ratio. ..."
https://yorickm.com/Message.php?pid=35126464Some mungofitch Medical Device posts:
Year Post
2012 https://yorickm.com/Message.php?pid=30023922
2012 https://yorickm.com/Message.php?pid=30197509
2012 https://yorickm.com/Message.php?pid=30248710
2012 https://yorickm.com/Message.php?pid=30248735
2012 https://yorickm.com/Message.php?pid=30249134
2013 https://yorickm.com/Message.php?pid=30736639
2013 https://yorickm.com/Message.php?pid=30880542
2013 https://yorickm.com/Message.php?pid=30978151
2016 https://yorickm.com/Message.php?pid=32222995
2016 https://yorickm.com/Message.php?pid=32255663
2020 https://yorickm.com/Message.php?pid=34469817
2020 https://yorickm.com/Message.php?pid=34606949
2021 https://yorickm.com/Message.php?pid=34710044
2021 https://yorickm.com/Message.php?pid=34710598
2021 https://yorickm.com/Message.php?pid=34865523
2021 https://yorickm.com/Message.php?pid=34956956
2022 https://yorickm.com/Message.php?pid=35126464
Some quotes from these posts:
For business model sustainability, there`s not much you can do from a quant point of view other than filter out the businesses that have had historically high failure rates, low average returns, or occasional panics/blowups. It never makes sense to put money in airlines, for example. You`re way better off with things like drugs, cosmetics, oil, medical devices, hotel&gaming.
There are some industries which have fundamentally good economics, and others which have fundamentally bad economics. The past won`t tell you exactly what`s best mainly because a given sector might be overvalued or undervalued right now, but it`s probably a pretty good general guide. In the next 30 years medical devices are still going to be in the top quartile and airlines are still going to be in the bottom quartile. Try a simple screen of only only those things in the top N industries by past performance followed by a simple 1-year momentum sort (RRS preferably).
Jeremy Siegel looked at the last 100 years of sector performance in his book "Stocks for the Long Run" and found that cosmetics, energy, pharmaceuticals, booze, tobacco, and medical device makers tend to have been the best industries to be in over the long run. That matches almost perfectly with my own research. Medical supplies, beer, armaments, pharmacy services, hotels/gaming have also done well. Much to my surprise basic chemicals and rails made the top 10 too. My work goes back only around 40 years.
Unless and until you have a very good reason to think otherwise in a specific case, the smart money bets that medical devices will do better than airlines, that beer will do better than clothes, and that soap will do better than paper. When in doubt go with the "base rate" for the situation under consideration.
That being said, I do believe that there are some industries that are simply better bets than others because they have structurally better business economics. I expect medical devices will probably continue to beat airlines, and cosmetics will still beat textiles.
Despite what people might tell you (EMH?), some businesses simply have better long run average economics than others. The "drugs" industry remains one of the ones that seems better than a average over the long haul. Some other good ones seem to be medical devices, makeup, oil, hotels&gaming.
Here`s an idea if you`re a fan: Try a low P/S screen limited to industries with commodity-like competition. e.g., exclude drugs, medical devices, branded consumer staples, beverages, tobacco, arms. Rather than building a list, you could simply pick out (say) the 2/3 of industries with the lowest industry-wide return on sales or return on equity, then do relative P/S within just those lower-markup businesses.
The general philosophy here: (1) take care of the risk, and the returns will take care of themselves. At least with that metric. (2) since you`re including sectors and perhaps industries, to a certain extent you`ll end up drifting towards those that have the best average long run returns, while avoiding chasing bubbles as might happen with a pure CAGR metric. You don`t want to get put into internet stocks in 2000-2001. The goal is to get put into (say) medical devices and gaming and makeup, not transport and toys and thrifts.
For example, historically some good winning industries have been drugs, medical devices, hotels and gaming, cosmetics, beer, rails, pharmacy services, oil. Tobacco was best by a wide margin for a long time, if you have the stomach for it. Similarly, if using backtests to do it, I`d use backtests of rankings of industries by their average value of some metrics, then use that test to decide which industry ETFs to buy. Much longer backtest than anything ETF based.
For individual stock screening some of my favourite criteria would be five year average ROE (available at the FT.com screener), and price to five year average EPS. I`d eliminate a number of industries, though, as their economics are unlike those of simple product and service forms for whom EPS works. As a general rule I`d skip banks, miners and commodities, utilities.
There is also much to be said for some very simple conservative "KISS" quant investing. This is the MI board. Buy 25 stocks that all meet reasonable criteria for being unusually predictable in their trend of rising value (not price). A couple of my suggestions would be a collection with unusually high ROE, which is simplest. Or a collection of stocks in industries with unusually good long run economics, like medical devices.
