StockStory Investment Framework and Performance Results Methodology

StockStory uses an AI-driven, human guided approach to find and invest in high-quality companies at reasonable prices. Our proprietary models target industry leaders with competitive advantages that remain strong even in down markets. This analytical approach works best with finding companies that you should hold for multiple years, preferably five years or more, while also avoiding struggling stocks poised to underperform.

As any avid investor would tell you, finding market-beating opportunities is extremely hard. You have to sift through the mountains of company financials to determine which metrics are determinants of quality and which are not. To make things even more challenging, these company financials are not static. They change and evolve with each passing quarter. And companies don’t just exist in a vacuum so all this fundamental analysis needs to also take into account the performance of peers and competitors. It can be daunting and time consuming.

Hedge funds invest millions into their analytical teams featuring the smartest math and finance whizzes around — a resource very few people have access to as retail investors. That’s why StockStory was created.

We want to give everyday investors the same AI-driven and expert analysis at a small fraction of the cost. In better words, we’re bringing the hedge fund to you so you can profit from our timely insights.

StockStory’s High Quality stocks offer a powerful mix of growth, profits, and strong cash flow—the key ingredients for succeeding long term in the markets.

At StockStory, we follow a few key rules to help you succeed. Our Lead Analyst, Anthony Lee, and his team built this approach based on their experience winning on Wall Street.

Diversification is the only free lunch in investing because the more stocks you own, the less likely that the failure of a single company will ruin your overall returns. Based on academic research from top institutions and track records of the best hedge fund managers, we recommend that investors hold roughly 20 stocks at any given time to achieve an optimal level of diversification.

Our investment recommendations are meant to be held for multi-year periods, ideally 3-5 years at minimum. To outperform the market and truly achieve financial freedom, you must find high-quality companies and have the discipline to hold them. This unlocks the power of compounding returns, which Albert Einstein famously called “the eighth wonder of the world.”

To be clear: owning high-quality businesses is the key to long-term success in the markets. You can increase your odds of generating true wealth by purchasing at reasonable prices. Yes, there are many ways to win, but these two core principles have made individual investors millions since the U.S. financial markets began.

Whenever we identify an attractively priced AND high-quality stock, we tag it with a “Timely Buy” sticker. Additionally, you can scroll down to the “Is Now The Time?” section in all our research reports to see our detailed thoughts on whether we recommend the stock at the current valuation or not.

A portfolio of StockStory Edge’s High-Quality stocks generated a return of 175% from September 30, 2019 to September 30, 2024 vs an 94% return for the market, which we define as the S&P 500.

If you invested a $100,000 investment equally divided into our 77 High Quality stocks would have nearly 3× your return, generating $275,000 in just five years.

Since our AI technology is new and our company wasn’t around five years ago, we can’t show actual results that align with our recommended investment horizon. Instead, we used a backtest to simulate performance.

We conducted our backtests by rewinding the clocks to September 2019. Brexit had been making headlines for months, Lizzo was topping the charts with “Truth Hurts,” and “Joker”—starring Joaquin Phoenix and directed by Todd Phillips—premiered at the Venice Film Festival. Most importantly, though, it was five years ago — our recommended holding period.

Our goal was to answer two simple questions:

One, if we were sitting at the end of September 2019, which stocks in our coverage would get the coveted High Quality label based on our proprietary models?

Two, how would an equally-weighted portfolio of those stocks perform five years later?

That’s it – no games were played. No selective rebalancing to kick losers out of the portfolio. No slick overweighting of winners to improve returns. No exclusion of sectors or stocks in our coverage that scored well but would have hurt returns. We simply re-ran our existing models and calculated the returns for the highest quality, cream-of-the-crop companies.

We at StockStory have developed proprietary models to assign quality scores to each company we cover. We analyze real historical metrics like revenue growth and free cash flow margins along with expected future performance such as Consensus EPS growth. We even include industry-specific metrics like customer retention that we deem correlated with business quality.

To generate the companies included in our backtest, we took our models and re-ran them for every sector and every company in our coverage as if today was September 30, 2019.

We then assumed that on September 30, 2019, $100,000 was invested equally across 77 companies that exceeded the threshold for being considered a High Quality business (roughly $1,300 each). Fast forward five years later, and we have the individual returns, the portfolio return, and how each of those compared to the S&P 500’s performance over that period.

Let’s take NVDA as an example, the top-performing High Quality stock from our September 2019 list of 77 high-quality stocks. NVDA scored the highest among our over 40 analyzed Semiconductor stocks because its revenue growth was stellar and expected to remain robust. It wasn’t just the topline, either. Operating and free cash flow margins were elite, and over a multi-year period, NVDA’s ROIC (return on invested capital) showed that it was enjoying a virtuous cycle of ample profitable investment opportunities that catalyzed strong cash conversion. This cash could be reinvested into more great opportunities in a rinse-and-repeat manner. These were best-in-class metrics for not just a Semiconductor company, but for any company.

These investments positioned NVDA to capitalize on the tidal wave of AI, and the rest is history. But NVDA wasn’t the only one that positioned itself well in 2019 – if you had seen it was a High Quality company using StockStory Edge and bought $10,000 of shares (when it was trading at $4.35, adjusted for the 2024 10-for-1 stock split), you would be sitting on over $275,000 today.

How about one that didn’t make the cut? KSS (Kohl’s) is a department store that scored poorly. In the three years before the September 2019 quarter, its annualized revenue growth was tepid and demand was projected to get no better. It faced stiff competition from not only other department stores but from specialty retailers as well. With the continued strengthening of e-commerce, the headwinds battering KSS intensified.

With an unimpressive margin profile and an even worse long-term history of returns on invested capital, KSS’s fate was sealed as a low-quality company. We were happy to avoid that one. It was a nearly $70 stock at the end of September 2019, and five years later, it was just under $30 per share. Our models analyzed the hundreds of stocks in our coverage in a similar manner. The two mentioned above are simple examples to give you a little glimpse of what’s under the hood.

We’ve read about some backtests where the final results are impressive, but the methodology is so byzantine that our eyes glaze over. Worse yet, we’ve encountered decisions that seem simply like cherry-picking to optimize for the final answer.

We played none of these games. In other words, we applied exactly what we do today to the data that was available five years ago, period.

The models we use to assess business quality today were not altered for the backtest. We considered our entire coverage universe and only tossed out companies that weren’t public in September 2019 for obvious reasons. We held all high-quality stocks in an equally weighted portfolio for five years, and we didn’t touch or rebalance the portfolio to maintain the integrity of our study.