Quality Portfolio: Final Phase

Making the necessary cuts for the final process to work.

The Cleanup

I've been steadily narrowing down the list of 171 stocks identified by the initial screen. As of today, that list is down to 86, essentially cut in half.

The first wave of cuts came from tightening the growth filters. I raised the minimum threshold for both 5-year revenue and earnings growth to 5%. That alone eliminated 60 companies: 51 didn’t meet the revenue bar, and 19 fell short on earnings, 10 overlapped.

The second round of cuts came from applying my valuation model, which is based on historical free cash flow analysis. Companies with consistently negative free cash flow don’t work in this framework. That knocked out another 43 names, 17 of which had already been removed due to the growth filters.

In total, 85 companies have been removed, leaving 86 under consideration.

Due Diligence Process

Eighty-six stocks is still a lot. I won’t be investing in all of them, that would be far too diluted. The next and final step before creating the investable universe is a round of high-level due diligence.

This won't be a deep dive into financials or forward assumptions. Instead, I’ll take a top-down approach, looking for any red flags. The idea is simple: if I find a good reason not to invest, that stock is out. If I don’t, it stays.

To make this manageable, I’ve categorized the 86 companies into three buckets:

• Companies I’m already familiar with – 22

• Companies I’ve reviewed in the past, but it’s been a while – 25

• Companies I don’t know well at all – 39

For companies I know well and have researched thoroughly, they’re automatically included in the universe. For the second group, I’ll do a light refresh. And for the unfamiliar names, I’ll dig deeper. Ultimately, it's about comfort, making sure there are no obvious reasons to regret an inclusion.

Companies I’m Familiar With

These 22 companies are well known to me and will move forward into the investable universe:

1. Apple

2. Accenture PLC

3. Automatic Data Processing

4. Applied Materials

5. Amphenol

6. ASML Holdings

7. Costco

8. Cintas

9. Domino’s Pizza

10. Intuit

11. KLA Corporation

12. Lam Research

13. Mastercard

14. Monolithic Power Systems

15. MSCI

16. Microsoft

17. Nvidia

18. Resmed

19. Rollins

20. TJX Companies

21. Visa

22. Zoetis

I hold positions in many of these names across various portfolios. They’ve come up repeatedly in my screens, and I’ve spent considerable time researching them over the years. That gives me confidence to include them in the universe.

But just to be clear: inclusion in the universe doesn’t guarantee a place in the final portfolio. That will depend on how they rank in the valuation model and how they compare to their peers.

The rest of the companies will be revealed after I complete the review. That also means the portfolio launch, originally planned for July 1st, will be delayed.

Valuation Model & Expected Returns

I've run my valuation model and estimated rate of return (ROR) on all 86 stocks. Actually, I modeled all 171 before cutting.

Here’s how the current group breaks down:

• 23 stocks are rated “Strong Buy” – Undervalued with ROR above 10%

• 6 stocks are rated “Buy” – Overvalued, but still expected ROR above 10%

• 57 stocks are rated “Hold” – ROR under 10%, with mixed valuation signals

Final Portfolio Strategy

This extended due diligence has been a blessing in disguise, it's given me time to reflect on how best to launch and manage the portfolio.

Here’s the plan:

• No hard cap on the number of stocks

• No fixed rebalancing schedule

• Keep positions that continue to meet long-term investment goals

• Exit positions only when fundamentals deteriorate, not just when prices drop

I’ll also apply a maximum position size, but that threshold will be determined once I finalize the list of holdings.

This portfolio will be funded with a lump sum at launch and won’t receive additional contributions. The goal is to achieve a 12% annualized return over a 25-year horizon, while also building a growing dividend stream.

For Dollar-Cost Averagers

If you’re following along and don’t have a lump sum to invest, I’ll also share a version of the strategy tailored for dollar-cost averaging (DCA). That approach can still benefit from the same stock selection principles.

Final Thoughts

I’m not sharing this to suggest you replicate it. Rather, I hope it offers insight into my investment approach. Early on in my investing journey, I learned a lot by observing what others were doing—taking ideas, filtering them through my own lens, and applying them thoughtfully.

That’s what I hope this content does for you: spark ideas you can shape into your own strategy.