Beyond Growth and Value: The Power of Quality in Earnings Consistent Portfolios

In investing, strategies often oscillate between growth and value. My approach, however, focuses on quality as a core principle. The Earnings Consistent Portfolios(“ECPs”) are designed to target stable performance by investing in companies demonstrating consistency and durability—the foundational elements of quality.

What Defines Quality?

Quality, in my view, is about identifying companies with:

• Consistency: Stable performance over time, resilient to market volatility.
• Durability: The ability to succeed through economic cycles and competitive pressures.

I assess quality using four key metrics:

• Return on Invested Capital (ROIC): This measures how effectively a company uses capital to generate profits. A high ROIC indicates efficient capital allocation, similar to earning strong interest on a savings account.
• EPS Linearity: This evaluates the predictability of a company’s earnings per share (EPS) over time. EPS represents net profit per share. Consistent EPS growth, like a steady stream, supports reliable forecasting.
• EPS Growth: This tracks consistent, year-over-year increases in EPS, signaling a healthy, growing business without significant disruptions.
• Free Cash Flow (FCF) Conversion: This measures how well a company converts profits into usable cash for dividends, share repurchasing, or reinvestment. High FCF conversion reflects a strong ability to generate accessible cash, akin to retaining most of your paycheck after expenses.

Companies excelling in these metrics typically have resilient business models that may help mitigate economic volatility, potentially offering sustained performance for investors.

Meet the Earnings Consistent Portfolio Family

The Earnings Consistent Portfolio family is designed to deliver reliable results across various market conditions. Each portfolio is carefully constructed to focus on high-quality, earnings-stable companies:

Earnings Consistent Portfolio

• Comprises up to 70 quality industrial companies with stable earnings, structured as an equal-weighted portfolio. This allows forecasting of forward 12-month EPS with over 95% confidence, serving as a diversified basket of securities informing macroeconomic inputs for portfolio valuation. The portfolio is reviewed quarterly, with minimal turnover to maintain stability.*
• Aims to deliver consistent performance, including during economic downturns.

Consistent Select Portfolio

• A concentrated portfolio of up to 30 high-quality companies, derived from the 70-stock Earnings Consistent Portfolio.
• Designed as an easier-to-manage version, offering streamlined oversight.
• Mirrors the characteristics and resilience of the Earnings Consistent Portfolio, with additional downside protection for enhanced stability.

Consistent Dividend Portfolio

• Includes up to 25 quality companies focused on providing consistent, historically increasing dividends.
• Built on the Earnings Consistent Portfolio foundation, this 25-stock portfolio offers risk mitigation with a low Beta of 0.64, aiming for sustained performance during economic downturns.
• Historically has outperformed the S&P 500 Dividend Aristocrats ETF (NOBL) by selectively reducing exposure to underperforming sectors within the Dividend Aristocrats.*
• Reflects stable performance due to underlying stocks’ consistent earnings growth of 8.82% annually over the past 20+ years*, with low earnings variability.
• Ideal for income-focused investors.

Why Choose Earnings Consistent Portfolios?

These portfolios are designed as core holdings, potentially reducing the need for mutual funds or ETFs. By investing directly in quality companies, investors may:

• Avoid managed fund fees, potentially lowering costs.
• Access a tailored strategy with competitive management fees, aligning investments with individual goals.
• Benefit from a cost-effective structure supported by a rigorous analytical framework.
  

Additional Benefits

• No unexpected capital gains distributions, supporting tax efficiency.
• Low volatility and minimal turnover, fostering stability for long-term investors.
• Tax-loss harvesting opportunities, comparable to mutual funds and ETFs.
• Potential use as a risk-mitigation strategy during market downturns.
• Opportunity to capture alpha in rising markets.

Associated Risks

• Exposure to broad market volatility, as market risk exists even with high-quality companies.
• Increased sensitivity from portfolio concentration/sector exposure by holding a relatively smaller number of stocks.
• Potential underperformance during market cycles, specifically during strong bull market periods so benchmark underperformance may occur.
• Dividend payouts and earnings forecasts are not guaranteed. Changes in industries, competition, or the economy can affect even the most stable businesses.

Bull Market Boost

For investors seeking to capitalize on strong market conditions, the Bull Market Tilt Portfolio, a high-beta strategy, includes up to 10 carefully selected stocks expected to outperform significantly during market upswings. These companies demonstrate strong potential to lead their industries with a clear path to long-term success. The same stringent earnings consistency criteria are applied, ensuring quality remains central.

Tailoring Your Strategy

The Earnings Consistent Portfolios are defensive by design but flexible enough to complement broader investment strategies. I can adjust the balance between ECP and other strategies, such as the Bull Market Tilt Portfolio, based on market conditions or investor preferences to potentially enhance outcomes.

Why Quality Matters

While growth and value strategies often dominate, quality is a critical yet underappreciated factor. It serves as the foundation for sustainable performance. The Earnings Consistent Portfolios leverage consistency and durability to aim for reliable results across economic environments.

Ready to explore how quality can enhance your portfolio? Contact me to discuss how Earnings Consistent Portfolios may align with your investment objectives.

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