The Perfect Portfolio

Imagine if there was a way to know the best performing stocks of each year ahead of time? According to Patrick O”Shaughnessy from Millennial Invest, if you had invested in the 25 best performing large caps of each year, you would have compounded your capital at 80% for each of the past 80 years. Sounds impressive, right? The only problem is that no one has a crystal ball that tells the future.

Mr. O”Shaughnessy looked into the common characteristics of the winners. His conclusion is that they did not have anything in common and it was impossible to identify them ahead of time with any degree of consistency. The 25 best performing large cap stocks of each year were equally likely to be super cheap or super expensive in terms of Price to Earnings Ratio. Earnings growth and price momentum were also not a big help for revealing the best future performers.

For the purposes of his research, O”Shaughnessy considers a large cap stock one with market capitalization above the average in the market. Market capitalization is the product of a stock price and total shares outstanding.

“Last year’s “perfect portfolio” would have included Facebook, Tesla, Delta Airlines, Netflix and Alcoa among others. These companies came from all different corners of the market, and many would have doubled your money in just one year”, says O”Shaughnessy.

It is true that the best performers of last year come from different industries and on a first look have very little in common, but if you dig deeper you will something quite intriguing. All of these stocks reported much better than expected earnings and as a result they gaped to new 52-week highs. More precisely, all of those companies reported several consecutive quarters of better than expected earnings.

On our site, we keep a list of 50 high-growth stocks, which we update every week. If you take a deeper look at the SL50 list, you will notice that many of the stocks there have crushed earnings estimates and received positive market reaction. One of the most enduring market edges is the so called Post Earnings Announcement Drift – the tendency for a stock to drift in the direction of an earnings surprise for several weeks (even several months) following an earnings announcement. Earnings surprises are also one of the main ingredient in our equity selection process.

Source: THE PERFECT PORTFOLIO by Patrick O’Shaughnessy