Inside today’s Daily Journal…

Editor’s note: Porter’s 2029: The End of America is now available as an Audible book here, or to read from Amazon here.

Yesterday we looked up the skirts of a few fallen angels – our favorite kind.

Today I want to shift our greedy eyes in the opposite direction.

There’s a good reason to avoid investing in companies whose shares aren’t performing well: there’s usually a good reason. Many turnarounds don’t. Many companies that make big, strategic investments (like CoStar’s move into residential) later record big, strategic write-offs.

Alas, life is risk. For investors, pricing that risk is the most important.

One way to avoid risk is to focus only on businesses that are delivering outstanding results. Usually, these cost more because there’s less risk. But how can you know which stocks will continue to perform and are therefore worth paying up to own?

Thirty years ago, I had the incredible good fortune to meet a true investment legend, Chris Weber. Chris took the money he made mowing lawns as a kid in Phoenix in the early 1970s and successfully pyramided gold futures, as gold became legal to own again in 1975. Later, in the early 1980s, he did the same thing, but in the opposite trade, buying interest rate futures on the U.S. long bond.

In short, over about a decade, Chris built a large personal fortune with essentially two trades: long gold and then long U.S. Treasury bonds. Chris is one of the very few self-made people I know who has never had a real job (except mowing lawns!). He has a sixth sense for the markets and that’s all he’s ever needed.

When I met Chris in 1996, he taught me something I’ve never forgotten.

I then watched Chris invest early into the internet bull market and make a fortune as those stocks went parabolic in late 1999. I watched Chris buy gold stocks when gold began its bull market in 2001. He made a fortune in 2006-2007 when those stocks went parabolic.

I’ve never seen Chris be wrong about a major market move. He’s an extraordinary investor. (By the way, Chris writes a brilliant letter every two weeks. It’s a very “insider’s publication” – he never advertises, and, fair warning, it’s very idiosyncratic. He’s not really writing for his readers. He writes to organize his thoughts for his own investing.

Watching the big artificial intelligence (“AI”) trend develop over the last three years, it occurs to me that this technology investment trend will be the largest of my lifetime. It’s going to migrate from information technology into physical markets through robotics. And it’s going to play itself out in virtually every industry.

Investing in the companies that are developing AI and robotics is a multi-decade opportunity. And there will be plenty of booms and busts along the way. It isn’t possible to know today what kinds of new opportunities will emerge in the years ahead, just like in 1999 no one could have forecast that a company called Meta would become one of the best businesses ever created using something called social networking, because that service – and the technologies that created it – didn’t yet exist.

To find the companies that are involved in this new, massive economic trend you could, of course, read the financial news. You could subscribe to a newsletter like this one. (We first described this investment trend – we call it the Parallel Procession Revolution – in the summer of 2024.)

Or… you could use the technology itself to help find businesses whose results are clearly accelerating.

That’s what I did last week. I used AI to look at every possible U.S.-listed equity with a market cap larger than $3 billion and average daily dollar volume of at least $10 million. I’m looking for established businesses, not start-ups. And then I applied a standard growth and quality gate. I wanted to find companies with revenue and profit (net income) growing year-over-year. And then I applied another gate – a much harder test of quality growth. I only wanted companies that were not only growing profits but were also growing profitability. I want stocks that are not only participating in the AI revolution, but that are participating at scale. Meaning, as revenue and profits are growing, so are their margins and their returns on invested capital (“ROIC”). It is in these kinds of stocks that massive investor returns are possible.

I used AI to find all of the qualifying stocks, and then I ranked the top 60, scored on revenue growth + earnings growth + ROIC improvement. I then cut the selection to only 20 stocks by using an algorithm to optimize both pairwise correlation (we don’t want to own a single idea expressed 20 ways) and three-month price momentum. We’re not looking for “undiscovered” stocks. We’re not looking for fallen angels. We’re looking for the highest-quality, leading growth stocks.

I tested this strategy by using this screen and rebalancing quarterly in a backtest over the last decade. To limit turnover and to simulate how you’d manage such a portfolio (to minimize taxes and trading costs), I assumed that to enter the portfolio a stock would have to score in the top 20 but could remain in the portfolio as long as it was a top-40 stock.