Watchlist Update - Q1 2025
The Goal of This Exercise
My investment strategy was initially highly quantitative, relying heavily on value-based stock screens.
The goal of this website/project was to incorporate a qualitative dimension into my analysis and establish the discipline of consistently reviewing individual companies. In other words, I wanted to enhance my mostly quantitative approach by integrating deeper, fundamental security analysis alongside quantitative methods.
The security analysis aspect of my process involves weekly deep dives into individual companies.
The buying and selling, however, represents the more quantitative side of my approach, where I take a more mechanical stance—focusing on purchasing stocks that are objectively cheap based on quantitative metrics.
That’s why it’s important to regularly review the current valuations of the stocks on my watchlist.
Before diving into the watchlist, I’d like to briefly explain how my approach blends both qualitative and quantitative elements.
The Case for Quantitative Investing
I’m still largely quantitative and systematic in my approach because I believe that, to some extent, “nobody knows nothing”—and having clear, rule-based processes helps prevent costly behavioral mistakes.
The best investments often look unattractive and are difficult for purely discretionary investors to buy, while the worst investments can appear highly appealing from a qualitative perspective. Without a structured system and defined rules, investors are more prone to significant errors.
Purely discretionary investors often get too caught up in the weeds of a company’s current challenges and fail to see how it could turn around.
However, mean reversion is a powerful force of nature—beaten up businesses can recover in ways that are difficult to imagine. Sentiment shifts are often extreme and difficult to predict.
This is one of the main reasons I believe many purely discretionary investors, despite their intelligence & work ethic, tend to underperform. They can easily get too into “the weeds” and this causes behavioral errors.
It might sound insane, but it’s true. I’ve listened to countless investor pitches and reviewed enough track records to see that this is a game where something as simple as a stock screen for low P/E ratios can often outperform highly driven, high-IQ discretionary investors who conduct exhaustive deep dives.
In this game, there’s no extra credit for effort.
Quantitative screens—or even value-focused index ETFs—often outperform even the most skilled purely qualitative value investors over time.
Discretionary investors may outperform occasionally, but over the long run, they tend to underperform compared to a systematic, rules-based approach.
A simple ETF like SLYV, which segments the market into small caps and holds the cheapest half, often outperforms many of the well-known value investors. Its straightforward, rule-based approach frequently proves more effective than the complex, thesis-driven strategies of celebrated investors.
Similarly, an ETF like QQQ consistently outperforms most growth investors, despite their in-depth research and analysis of individual companies' prospects.
A hedge fund analyst would likely be ridiculed for suggesting, "This stock is quantitatively cheap, and while I have no clear idea how it will turn around, it’s still worth buying."
Yet, this is often the best kind of stock pitch!
In many cases, a systematic, quantitative approach outperforms even the smartest managers building complex theses around catalysts and narratives. History shows that, more often than not, simple value screens tend to beat even the most sophisticated discretionary value investors.
Why I’ve Added Qualitative Elements to My Approach
That being said, I’ve come to appreciate the meaningful value that qualitative analysis can bring to the investment process. While I’ve previously leaned toward a 'maximalist' quantitative approach (outlined above), I now recognize that incorporating qualitative insights can significantly enhance decision-making.
My current approach blends quantitative rigor with qualitative insights to capture the strengths of both.
While I’m a strong advocate of quantitative methods, I’ve found that a purely quantitative approach can be unreliable.
Stock screens are excellent for evaluating financial metrics and valuations, but they often fall short in identifying truly exceptional businesses with sustainable long-term potential.
A good example is Joel Greenblatt’s Magic Formula, which attempts to combine quality (via ROIC) and value (via EV/EBIT) in a mechanical manner.
Despite its thoughtful design, the strategy has underperformed since publication. Additionally, research by Tobias Carlisle confirms that focusing solely on EV/EBIT outperforms the combination with ROIC.
This is largely because ROIC, by itself, is not an ideal indicator of quality. Mechanical screens that target high ROIC often highlight companies experiencing short-term success, which is prone to mean reversion. The key is not just identifying companies with high ROIC today but finding businesses capable of sustaining strong ROIC over the long term.
I concluded that there isn’t a purely mechanical way to identify long-term quality. Instead, this requires qualitative analysis—evaluating moats, growth prospects, and the overall strategic outlook for a business.
To address this, I’ve implemented a structured, qualitative review process. Each week, I analyze individual businesses, evaluating their long-term strengths and growth potential. If a company meets my quality criteria, I add it to my watchlist—forming a curated universe of potential buy candidates.
The ultimate goal is to build my own curated universe of stocks—companies that meet my qualitative criteria for long-term investment potential:
Strong competitive advantages (moats): Businesses with defensible market positions that can withstand competitive pressures.
Sustained ROIC above WACC: Companies consistently generating returns well above their cost of capital.
Compounding potential: Firms capable of reinvesting profits to grow and compound value over time.
Recession resilience: Businesses with the durability to weather economic downturns, ensuring that even if my timing isn’t perfect, I avoid significant losses over a full economic cycle.
Once I’ve constructed this universe, I apply quantitative value principles to select investments. In this way, I restrict my analysis to businesses that I believe have enduring quality and then seek out the most attractively priced opportunities within that subset.
This approach naturally limits my investment universe, especially when I first began a few years ago and had only conducted in-depth reviews of a handful of businesses. By focusing on companies with moats and recession resilience, I exclude many potential opportunities. There are certainly businesses without these characteristics that may be great investments, but I believe they are less predictable and too risky to buy in a mechanical manner.
Given that I run a relatively concentrated portfolio of only 15 positions, I’m comfortable being selective. Out of the thousands of stocks available globally, I only need to choose 15. This allows me to be highly restrictive in constructing my universe.
Why I Avoid Cyclicals/No-Moat Businesses
It’s worth noting that I’m comfortable holding a concentrated portfolio of only 15 stocks, as long as they have defensible market positions, strong moats, and recession resilience.
However, I wouldn’t be comfortable with such concentration if the stocks were highly cyclical or lacked any kind of moat and required frequent trading to time entries and exits precisely.
The entire point of my approach is to identify stocks that can perform well over the long term because I don’t believe that I—or anyone else—can consistently time entries and exits with precision over an extended period.
Terry Smith explains this well right here:
Part of this restraint stems from my belief that the business cycle is inherently chaotic and unpredictable. Over the years, I’ve listened to countless macro "gurus" on podcasts, TV, and in written pitches, and I’ve tracked their predictions closely. Almost without exception, they’ve been completely off the mark—proving that most can’t predict anything with real accuracy.
Because economic downturns can’t be predicted, I prefer to avoid holding cyclical stocks during economic downturns, as the timing and severity of such downturns are unknowable.
This belief was reinforced by personal experience—particularly during the March 2020 COVID-19 drawdown. At the time, I held a significant number of cyclical no-moat stocks. Fortunately, I exited many of those positions just in time. However, if I had held them mechanically (the way I prefer to manage my portfolio), I would have faced massive drawdowns.
As it was, I experienced a 20% drawdown, while the stocks I sold as a group dropped over 60%. That was the "good" part of the story.
The bad part was that I was too slow to get back in and I missed the early stages of the rally.
I quickly realized that this wasn’t a sustainable strategy—it’s not enough to exit at the right time; you also have to re-enter at the right time.
Instead, I’d rather focus on owning the kind of stocks where timing matters much less, allowing me to stay invested without constantly trying to outsmart the market.
That experience taught me a valuable lesson: I should focus on businesses that, as a group, are resilient enough to avoid severe losses during economic downturns.
While their value may decline, it won’t pose an existential threat to my portfolio or force me into a make-or-break decision. Instead, these companies are likely to perform well over time, regardless of where they are in the economic cycle when purchased. Although it would be ideal to time recessions perfectly and buy cyclicals at the bottom of the business cycle, I recognize that this skill is beyond my reach—and, realistically, beyond anyone else's as well.
Valuation Metrics
Over time, my approach to valuation has also evolved.
I used to rely heavily on current free cash flow (FCF) yield and the EV/EBIT ratio.
While useful, these metrics often exclude companies whose earnings or cash flow are temporarily depressed. Ironically, companies facing temporary setbacks often present great buying opportunities—particularly when I believe their margins and prospects are temporarily suppressed rather than permanently damaged.
To address this, I’ve shifted toward using historical price-to-sales (P/S) multiples as a complementary metric.
Specifically, I look for companies trading at a discount to their historical P/S multiples. This can reveal attractive opportunities even when EV/EBIT ratios appear elevated. For example, a high EV/EBIT multiple may simply reflect short-term margin compression rather than an overvalued stock.
Watchlist
With all of that in mind, let’s dive into the current watchlist, which includes 100 companies. I’ll begin by reviewing the overvalued stocks—those trading significantly above their 5-year average P/S multiple—to identify positions in my portfolio that might warrant trimming. After that, I’ll assess the undervalued stocks—those well below their historical P/S average—to identify potential buy candidates.
In the list, positions currently held in my portfolio are highlighted in blue. Please note that the valuations reflect market closing prices as of January 3, 2025.