My personalized stock-ranking system on my 'Big Four' stocks
I always get some interesting ideas when I'm tossing and turning in the wee hours of the morning, trying to get one more hour of sleep...
One of those is that I should have a more personalized rating system for the stocks I discuss here in my daily e-mails.
Of course, I have the Stansberry Score here at our firm. This proprietary, automated scoring system grades thousands of stocks across four dimensions – capital efficiency, financial strength, valuation, and momentum. And the scores range from zero to 100.
That said, investing is a game of judgment. And there's room for using your intuition and experience to help sort out stocks.
To make my thinking clear, I'll assign some numbers to how I would judge stocks. Think of it as a simple "mental scoring system" to complement our firm's Stansberry Score (which is based on dozens of complicated factors).
As I noodled on it, I decided to have two ratings (both ultimately subjective – they're my opinion):
- One for the quality of the business
- The other for the valuation of the stock
And while initially I thought about an "A" through "F" ranking, I don't think that's granular enough. So I'll use a ranking from zero to 10.
My "Quality" rating will be based partly on quantitative factors like margins, balance sheet strength, and free cash flow. But it will mostly be rooted in qualitative factors such as my assessment of a company's competitive position (and, critically, its "moat" to maintain it), future growth prospects, and management.
My "Valuation" rating will be the reverse – based more on objective measures like price-to-earnings (P/E) and price-to-book (P/B) ratios. (That said, I also reserve the right to call one business "cheap" and another "expensive," even if both are trading at 20 times this year's earnings.)
Let's give my new ranking system a trial run by ranking my "Big Four" stocks that I've been pounding the table on over the years...
As regular readers know, they were the core holdings I recommended in the April 2019 inaugural issue of my former newsletter, Empire Investment Report, at my old firm Empire Financial Research:
- Berkshire Hathaway (BRK-B)
- Alphabet (GOOGL)
- Meta Platforms (META)
- Amazon (AMZN)
Since then, they're up an average of 240%, which is nearly double the S&P 500's 135% return. And my view today is the same as it has been for more than six years: These are all great stocks for conservative, long-term-oriented investors.
Let's get to it...
Starting with Berkshire, the company is a vast collection of wholly owned businesses (ranging from decent to great), blue-chip stocks, and $382 billion of cash – managed by Warren Buffett, the greatest investor of all time.
But Buffett is 95 years old. And he will be passing the reins to Greg Abel on January 1, which introduces some management uncertainty. Additionally, such a large company is unlikely to be able to grow much faster than the U.S. economy as a whole.
As such, my quality rating would be an 8.
As for valuation, in my November 4 e-mail I calculated that Berkshire's intrinsic value ("IV") was about $802,000 per A-share (or $535 per B-share). The previous day, the A-shares closed at $712,170. As such, I concluded that Berkshire was attractively priced at an 11% discount.
Since then, let's assume that Berkshire's IV has increased by 0.7%. That's in line with the S&P 500 (a reasonable proxy for Berkshire's stock portfolio) and reflects a month of growth of the business. So that would put Berkshire's IV at about $808,000.
But Berkshire's A-shares have risen to $761,161 as of yesterday's close... so the discount to IV has shrunk to about 6%. I would give a slightly undervalued stock like this a Valuation rating of 6.
Up next is Alphabet – one of the greatest businesses of all time...
It's a leader in Internet search, e-mail, video streaming (YouTube), autonomous driving (Waymo), cloud computing, and AI.
As such, Alphabet has mouth-watering margins and cash flows and grew its revenues by a healthy 16% year over year in the most recent quarter. (I covered that earnings report in my October 30 e-mail.)
Alphabet's many moats are likely to remain intact. And its future growth prospects are excellent. So I'm giving it a perfect 10 for quality.
However, the stock is up a remarkable 66% this year through yesterday's close. So it's not as cheap as it previously was.
At yesterday's closing price of $314.89 and consensus 2026 earnings estimates of $11.16 per share, that puts the stock's forward price-to-earnings (P/E) multiple at about 28 times.
That's higher than it has been in a while, thanks to the huge run-up this year. But it's still only a modest premium to the S&P 500's 22 times to 24 times forward multiple today (depending on whose estimates you use). So I would give Alphabet a Valuation rating of 6.
Moving on to Meta, it's also one of the greatest businesses of all time...
It boasts 3.54 billion daily active users of its various apps – including Facebook, Instagram, and WhatsApp (none of which I think will be displaced).
Despite its size, last quarter it grew revenues by a remarkable 26% year over year. (I also covered Meta's latest earnings in my October 30 e-mail.)
That said, the business isn't as diversified as Alphabet's. And it faces more regulatory risk because the apps have more, shall we say, "negative externalities" (scammers, disinformation/manipulation, triggering anxiety, depression, and/or self-harm among teenagers, etc.). So I would give Meta a Quality rating of 9.
Closing at $640.87 per share yesterday, the stock is trading at a bit more than 21 times the consensus 2026 earnings-per-share ("EPS") estimate of $29.74.
That means one of the greatest businesses of all time (which is growing revenues and earnings north of 20%) trades at a multiple near that of the average large U.S. business. That's wild! I would give Meta a Valuation rating of 7.
Lastly, Amazon is also one of the greatest businesses of all time...
It dominates online retailing, leads in cloud computing, and invests heavily in AI.
Year over year, Amazon grew revenues and EPS 13% and 36%, respectively, in its most recent quarter. (See my October 31 e-mail for my take on the full earnings report.)
Barring a recession, I think the company can increase revenues at a double-digit rate and grow profits at more than 20% annually for many years to come.
That said, Amazon's core retail business is low-margin. And both this business and cloud computing are very competitive. So I would give Amazon a Quality rating of 9.
At yesterday's close of $233.88 per share and consensus EPS estimates for next year at $7.85, Amazon is trading at roughly 30 times forward earnings.
That's a rich multiple. But it's warranted for a company this dominant, with many levers to pull to grow margins. As such, I give Amazon a Valuation rating of 7.
So here's the summary of my Big Four stocks with my personalized rankings:
This helps show why I continue to like all of them...
These are four insanely great businesses, with stocks that are slightly to moderately undervalued.
As I said, this scoring system is subjective and more personalized to me – using my intuition and experience to organize and rank stocks. Again, think of it more as a mental complement to our firm's Stansberry Score.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.