David Polen’s Quality-and-Value Stock Selection System

Summary

The document translates David Polen’s bottom-up investment principles into a quantitative stock-selection approach. The original framework emphasizes financially strong companies, ample free cash flow, earnings momentum, valuation based on expected returns relative to alternatives, diversification, and a margin of safety. Its China-oriented adaptation ranks firms against market averages using measures such as leverage, free cash flow, free-cash-flow valuation, return on equity, profit growth, and return on invested capital; it also specifies a benchmark-rate hurdle.

The proposed implementation rebalances monthly and sets individual-stock and market-wide loss triggers for selling. The reported backtest covers January 2014 through June 2017 and gives annualized strategy and benchmark returns, maximum drawdown, win rate, and average holdings. In that period, the reported annualized return was below the benchmark, despite a reported win rate of 69%. These historical figures cover a limited period and do not establish future performance. The document does not detail transaction costs, data handling, or the exact construction of several market-relative metrics.

Key ideas

• The system seeks financially strong companies with free cash flow, earnings momentum, and attractive valuation.
• The China adaptation uses market-relative balance-sheet, cash-flow, profitability, growth, and return-on-capital filters.
• The proposed portfolio rebalances monthly and includes stock-level and market-level sell triggers.
• The reported 2014–2017 backtest shows annualized returns below the benchmark, with a 69% win rate.
• The document leaves transaction costs and several metric-construction details unspecified.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.