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First Cut Stocks

S&P 500 Stocks With the Potential to Outperform in 2024

Applying the characteristics of past top-performing stocks to the components of the S&P 500 index at the end of 2023.

by Charles Rotblut | January 2024

Charles Rotblut leads a class in AAII's new Essential Investing Video Course. Go to https://www.aaii.com/ves for more information and to subscribe.

Martin Fridson shared the traits he found to be associated with the best-performing stocks in the S&P 500 index in the May 2023 AAII Journal (“What Helps and Doesn’t Help Find Top-Performing Stocks”). Those characteristics were based on research he did on the past top-performing stocks in the large-cap index for his book, “The Little Book of Picking Top Stocks: How to Spot Hidden Gems” (Wiley, 2023). Though we couldn’t replicate his exact criteria, we were able to come close in several instances.

One key characteristic is a high level of dispersion in analysts’ earnings estimates. The greater the differential between the highest and the lowest earnings estimate, the more likely the company is to surprise. We sought out stocks with the highest levels of standard deviation in their current-year (Y1) earnings estimates, mostly for fiscal years ending in December 2023 or January 2024.

Stocks of smaller S&P 500 companies have tended to be more likely to become top performers than those of larger companies. Therefore, all passing stocks have a market capitalization below the S&P 500 median of $33 billion.

Above-median volatility is sought out, as more volatile stocks are those experiencing greater price swings. We used beta as a proxy, requiring beta above the median of 1.06 for the S&P 500.

Fridson observed that the companies whose credit ratings weren’t top-notch tended to be smaller and more leveraged. Higher levels of debt tend to magnify positive developments, leading to bigger price jumps. Moody’s investment-grade ratings range from Aaa to Baa3. Ratings of Ba1 or below are non-investment grade.

The final trait is one we couldn’t screen for—a catalyst to move the stock. It can be a change in the business strategy, a new product, a rebound in revenues and profits or something else. This requires researching the stocks themselves. The list below provides a starting point for companies to look at.

S&P 500 Stocks With Traits Associated With Previous Top Performers

Criteria to Use in Stock Investor Pro
  Field: Operator: Factor: Compare to:
  Standard and Poor stock Equals   500
And Market Cap Q1 <   33000
And Beta >   1.06
And EPS Est Y1-Std. dev. >   0.28

Discussion

MANJUNATH S from CA posted over 2 years ago:

"EPS Est Y1-Std. deviation" Is that provided by the LSEG data provider based on a bunch of analyst targets and then a std dev is calculated?


Robert G from TN posted over 2 years ago:

Does AAII provide a history of their "stocks with potential to outperform" lists of stocks in order allow us to examine how well the suggestions actually performed in the associated time frames? That would provide increased confidence in the rationale for those predictions. I realize that this list for 2024 (and other such lists I suspect) are "starting points for companies to look at."


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