Adaptive Strategy

What is the best metric for evaluating stocks? Most people will tell you P/E. I use estimated earnings (E) and P/E becomes Forward P/E (a.k.a. Expected P/E). Switch it over to E/P for easier to understand, and it is termed Earnings Yield (EY = P/E). However, the ‘E’ is not ‘expected’ which is better to predict future stock value. I prefer EY to be calculated with Forward Earnings and most sites do not provide it but you can calculate it easily.

When the market favors momentum stocks, fundamental stocks even with good Earnings Yields may not work. In this case, I prefer momentum stocks with EY better than average.

EV/EBITDA (obtainable from Yahoo!Finance) is better than P/E as it includes interest, debt and cash. Switch it over and it is True Earnings Yield (my term).

Some may tell you ROI and there is a successful book on ROI.

Both P/E and ROI should not be the only metric as there is no single evergreen metric. That is why most people have poor performance by following them blindly. It is the herd theory: The performance is usually decreased in the longer term when too many folks follow it.

Here is my test on the S&P 500 stocks from April 1, 2019 to July 1, 2019.

I used the top 10 stocks from each sort. Commissions, dividends and spreads are omitted for simplicity. SPY’s return is annualized to 13.8%.

Value parameters

Top 10 stocks sorted by	Best SPY1
EY in descending order	-251%
Dividend Yield in descending order	-291%2

Opposite of the above

Top 10 stocks sorted by	Best SPY1
EY in ascending order	6%
Dividend Yield = 0	138%3

¹   Beat by % = (Avg. return of 10 stocks – SPY) / SPY

²   Including dividend yields for the average 10 stocks and SPY, “Beat SPY’ is reduced to -241%.

³   Just randomly picked the 10 stocks that do not pay dividends as there are more stocks with no dividends.

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For more of my reasoning, check out the book described next. The Kindle has 850 pages (6*9) for $9.99. It could be the best $10 you ever spend.

The above is an abstract from my book "Complete the Art of Investing" which is available from Amazon.


I challenged to have the best-performed article in Seeking Alpha history, an investing site, for recommending 5 or more stocks in one year after the publish date. The concepts for that article are discussed in this book.

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