The 2025 VSG Stock List
I am updating the format of this website.
Before I dive into the changes, let me reassure you about what’s not changing:
Weekly deep dives into standout companies.
Watchlist updates on on the valuations of my curated universe of wonderful companies.
Early access to podcast episodes for subscribers.
The key change is that I will no longer be sharing trades from a discretionary real-money portfolio. Previously, I regularly shared updates from my real-money trades. However, due to changes in my personal circumstances, I will no longer be able to trade as frequently as before.
While I can no longer continue in this manner, I believe it’s important to continue sharing the performance of my research and ideas.
As I’ll explain in this post, I will continue sharing the performance of an index—which I’ve named the VSG Stock List—based on my research and a curated watchlist of wonderful companies. This list will then be refined using a stricter quantitative approach.
While this change is driven by practical considerations, I believe that adding a more rigorous quantitative framework to the portfolio's construction will result in a stronger, more effective strategy.
Reasoning for the Changes
My real-money portfolio previously relied heavily on discretionary decisions rather than systematically selecting the cheapest companies from my watchlist.
In the past, I selectively targeted specific companies, with trades occurring sporadically throughout the year. Moving forward, I will use my watchlist—constructed with qualitative insights—and apply quantitative criteria to select stocks, replacing my more discretionary approach. The portfolio will rebalance only once per year, on the first trading day of the year.
I believe these changes are a positive step forward, as they align with concepts I’ve been reflecting on, particularly the comparative strengths of quantitative versus qualitative strategies.
To that end, I’m introducing a new portfolio that still remains entirely rooted in my research. I maintain and regularly update a qualitative watchlist, where I rank a curated universe of companies based on my assessment of whether they qualify as "wonderful" businesses. The current watchlist is tracked here and updated consistently.
In my view, the qualitative element of my process involves evaluating whether a company is "wonderful" enough to belong in the universe.
The quantitative aspect is about owning the cheapest companies within that universe. Although I’ve wanted to implement this strategy for some time, the universe of wonderful companies I track wasn’t large enough before. Now that it includes over 100 companies, I believe this approach can be effectively implemented.
The portfolio will combine both qualitative and quantitative elements. The qualitative aspect involves ongoing weekly research to determine which companies qualify as "wonderful." The quantitative side involves selecting the 15 cheapest companies from that universe and tracking their collective performance as a group.
This portfolio represents my own interpretation of Joel Greenblatt’s Magic Formula. As I’ve discussed in previous posts, I believe the Magic Formula has a key flaw: the quality component, specifically return on invested capital (ROIC), is difficult to quantify accurately. High ROIC businesses often experience mean reversion over time.
In my view, while financial quality and valuation can be measured quantitatively, determining whether a business is truly "wonderful" requires a deeper, qualitative assessment. A simple screen cannot capture the nuances that make a business exceptional.
That’s the entire purpose of this project that I began in 2021—to evaluate companies individually and determine whether they fit the mold of a wonderful company with the potential to compound value over the long term.
High Level Methodology
Each year on December 31st, I will reset the portfolio and introduce the 15 stocks that make up the VSG Stock List. Performance will be tracked throughout the year, with quarterly updates to monitor progress.
This new approach aims to provide a structured, rules-driven portfolio that reflects my analysis while adhering to my new constraints.
Portfolio Structure
Going forward, I will update the valuations of all companies in my watchlist of "wonderful" companies each December. This watchlist is regularly refined based on qualitative assessments: new companies that I deem wonderful are added, while those that no longer meet my standards are removed.
From there, I will apply quantitative criteria to narrow down the list:
Earnings Yield: Companies must have a forward earnings yield that exceeds the current 10-year Treasury yield.
Financial Quality:
Altman Z-Score: Must be above 1.81, indicating low bankruptcy risk.
Beneish M-Score: Must be below -1.78, suggesting the company is not engaging in earnings manipulation.
Return on Capital: The 10-year average return on invested capital (ROIC) should exceed the current estimated weighted average cost of capital (WACC).
Once the list is filtered, I will rank the remaining companies by their percentage discount to their 5-year average price-to-sales (P/S) ratio. The final portfolio will consist of the 15 companies with the deepest discounts. In an overheated market, this may include companies with only modest discounts to their average P/S multiple.
I prefer this valuation metric because a company’s typical P/S ratio tends to reflect its underlying business quality. Rather than evaluating the P/S ratio in absolute terms, I find it more meaningful to consider how the stock’s current valuation compares to its historical trading range.
Annual Rebalancing
The portfolio will be updated annually on December 31st. Companies that remain on the list will be rebalanced to equal 1/15th of the total portfolio. There will be no additional trades or changes during the year. Performance will be tracked and reported annually based on the December 31st portfolio, with no mid-year adjustments.
I find it unlikely that there won’t be at least 15 stocks with a forward earnings yield exceeding the current 10-year Treasury yield every year. However, if such a scenario arises, I will replace that portion of the portfolio with an equally weighted S&P 500 ETF. This ensures that the portfolio remains fully invested at all times, regardless of market conditions.
Now, let’s dive into the 2025 version of the VSG Stock List, which I will track throughout the year.
The 2025 VSG Stock List
Using this methodology, I’ve filtered my current watchlist by forward earnings yield. As of 12/31/24, the 10-year Treasury yield stood at 4.58%.
This forward earnings yield filter narrowed my initial watchlist of 100 stocks down to 44.
Next, we will narrow the list down to the 15 companies trading at the deepest discount to their 5-year average price-to-sales (P/S) multiple, among those that still meet my quantitative financial quality criteria.
Here is the current 2025 VSG Stock List: