Getting Your Portfolio in Better Shape

Idea Generation

The process starts by entering each company into a spreadsheet, resulting in this progress file on the portfolio change.

The grand rank is a weighted average of the ranks of the other variables, where a low number indicates desirability. The "RSI price 52-week" rank is a measure of price level. Zero means a 52-week low and 100 a 52-week high, and it grades in between. I prefer buying companies near their 52-week lows if I can get some assurance about their balance sheet quality and earnings power.

NOA is net operating accruals: Zero means a low level of accruals; 100 means a lot. This is an important measure of overall accounting quality. Companies with high NOAs are generating a large amount of their earnings from accounting accruals, which assume (normally correctly) that cash will come at a future point in time. Accruals are never as certain as cash, though, and companies with high NOA readings tend to underperform.

"RSI price 52-week" rank, NOA, price-to-sales and price-to-book get a double weight. Everything else gets a single weight. I vary the weights each period based on my concerns. When I am more bearish, I overweight the things that I am overweighting now. P/Es shift more than valuation ratios based off of book or sales. The 52-week-price rank tilts me toward companies nearer their 52-week lows. Low NOA scores help assure good earnings quality on average.