The Momentous P.R.U.D.E.N.T Process™

There are over 20,000 individual stocks listed on the exchanges around the world and close to 8,000 just in the United States. Stock Investing takes discipline. Using a structured and strategic process for picking stocks is crucial for successful investing. The Momentous P.R.U.D.E.N.T Process™ for picking stocks starts with an advanced screen using an underutilized rule called the “Rule of 40.” We then screen for high earnings growth, low debt, and attractive prices to identify potential stocks to buy.

The Rule of 40:

Revenue Growth + Net Profit Margin = 40 or higher

P- Profit Margin

As the first part of the "Rule of 40" calculation, which is used to assess the financial health of a company, we screen for companies that exhibit a net profit margin of 15-30%. This crucial metric provides valuable insights into a company's ability to generate profits and effectively manage its resources. Companies with strong profitability are more likely to have sustainable growth and better withstand economic fluctuations with resilience. 

This first screen narrows the list of 8,000 companies to typically less than 1,500.

R- Revenue growth

As the second part of the “Rule of 40,” we screen for companies that demonstrate strong financial performance of 25% or higher revenue growth over the past 3 years.

This screen and Net Profit Margin criteria narrow the list of companies to typically less than 500.

U- Undervalued vs. Price

The next crucial step involves determining a fair market value threshold, which we typically set at .80% or lower.  We aim to identify opportunities that offer attractive risk/reward potential by adhering to this criterion. We also look at other valuation metrics like PEG ratios and Price/Sales ratios.

D- Debt Levels

The next step in this process is to filter out companies that carry a burdensome amount of debt. We look for companies with zero debt or debt-equity ratios of less than 1. This metric allows us to build portfolios that are more resilient and poised for potential long-term growth.

E- Earnings Growth

One of the key factors we consider when assessing investment opportunities is the Earnings Growth of companies. Our strict criteria require a minimum threshold of 15% or higher earnings growth over the past 3 years to identify companies with a strong track record of profitability. We also look at earnings revisions and estimated future earnings to determine if a company is poised for growth going forward.

N- New Product or Competitive Moat

Is the company launching a highly anticipated new product that has the potential to be a significant catalyst for exponential growth in its industry? What is the market opportunity? If they don’t have a new product, do they have a product or service that is gaining more and more market share or have a competitive moat?

T- Trend of Stock Price

When analyzing stocks, one of the key questions we often ask is whether the stock is currently in an uptrend or downtrend. In our quest to identify potential investment opportunities, we focus on stocks that not only display good fundamentals but also solid technical indicators like rising Relative Strength and Moving Averages. If a stock is trending down, they are put on our watchlist for further review in upcoming quarters.

The Momentous 25

The final step is running the stocks screened through a risk/reward analysis using Nitrogen Wealth. We use their Riskalyze GPA™ ranking system which analyzes the relationship between expected potential performance and expected potential downside risk over the next 6 months for the investment. The final list is made up of 25 stocks diversified among a variety of industries and overweighted in the strongest drivers of our economy: technology, health care, financials, and consumer discretionary.

By using the Momentous P.R.U.D.E.N.T Process™ for picking stocks, we help ensure that our investment decisions are based on thorough and meticulous analysis. This process allows us to identify potential opportunities and evaluate their risks before investing. Contact us to determine whether individual stocks are right for your portfolio.

-Brian D. Muller, AAMS® Founder, CCO and Wealth Advisor

Disclaimer: This material is for informational purposes only and should not be construed as investment advice. Past performance is not indicative of future results. Investors should make investment decisions based on their unique investment objectives and financial situation.

Investors should understand the risks involved in owning investments, including interest rate risk, credit risk, and market risk. The value of investments fluctuates and investors can lose some or all of their principal.

Diversification does not guarantee a profit or protect against loss in declining markets.

Systematic investing does not guarantee a profit or protect against loss. Investors should consider their willingness to keep investing when share prices are declining.

Dividends may be increased, decreased, or eliminated at any time without notice.

Special risks are inherent in international investing, including those related to currency fluctuations and foreign political and economic events.

Always consult with a qualified financial professional before making any investment decisions.