Strategy 4 is the Motley Fool-inspired screen in this journal. It looks for quality mid-cap businesses: profitable, growing, financially disciplined. On paper, one of the most sensible frameworks in the lineup. In practice, when you run it, it returns somewhere between 66 and 72 stocks — a number that fluctuates with the market but never comes close to a portfolio anyone could manage with real attention.
Sixty-eight stocks is not a portfolio. It is a census. You cannot track retention meaningfully, you cannot attribute returns to specific holdings, and equal-weighting 68 positions gives each one a 1.5% share of the portfolio — so much diversification that even a strong performer barely registers. The screen is selecting for the right things. It is simply not selective enough.
This post works through what each of S4's six variables is actually doing, identifies the specific gap in the logic, and proposes a seventh variable — with a precise threshold — that brings the output down to a workable 17 stocks without adding complexity or changing the screen's fundamental character.
What the Six Variables Are Actually Doing
Before adding anything, it pays to be precise about what each existing variable catches — and where it stays silent. A variable that sounds strict may, in practice, exclude very few companies. Understanding the porous gates is how you find the right fix.
The Gap: Revenue Is Growing. But Are Earnings?
Look at what the six variables collectively demand: a mid-size company with strong equity returns, low debt, solid liquidity, high profit margins, and five years of rapid revenue growth. That is, by any standard, an excellent-sounding business. The problem is that none of these six variables ask the critical follow-up question:
Is the growth actually reaching the bottom line — or is it just bigger numbers at the top?
Sales growth above 20% for five years is a real credential. But sales growth is a top-line metric. A company can grow its revenue aggressively — by cutting prices to gain share, by acquiring businesses at inflated valuations, by booking revenues before they have been earned — and still pass every single one of the six current filters. The net profit margin filter helps: it confirms the business is profitable right now. What it does not confirm is whether that profitability is building over time or slowly being eroded as the business scales.
A company could have grown sales at 25% per year for five years while its earnings per share went nowhere — because margins compressed, because new shares were issued to fund acquisitions, because the growth required reinvestment that has not yet paid off. Every variable passes. No flag is raised. And that company ends up in a 68-stock list alongside businesses that are genuinely compounding their earnings.
The specific gap
The screen checks that the business is profitable (Net Margin >15%) and growing (Sales Growth >20%). It does not check whether the profitability itself is growing. Those are different things. A business can be both profitable and growing while its earnings per share are flat — and six of the current variables would never know.
The Fix: EPS Growth — and Why the Threshold Is Everything
Adding EPS Growth (3-Year) closes the gap directly. It requires that earnings per share have grown at a sustained annual rate over the past three years — confirming that the growth visible at the revenue level is actually flowing through to shareholders, not disappearing into costs, dilution, or acquisitions.
The question is not which variable to add. It is what threshold to set. And the threshold is where most of the real decision lies.
EPS Growth (3Y) > 15%
EPS Growth (3Y) > 30% ← chosen
At 15%, EPS Growth is a real filter but not a demanding one. Around 25 companies pass it when combined with the existing six variables — workable, but not a meaningful reduction from the 68-stock starting point. More importantly, a 15% EPS growth bar admits a lot of companies that are growing their earnings at a perfectly decent rate while not actually compounding at the pace the screen's sales growth filter implies they should be. The filter is loose enough that it allows in businesses where the earnings trajectory and the revenue trajectory have quietly diverged.
At 30%, the filter becomes genuinely selective. EPS compounding at 30%+ annually for three years means earnings per share have roughly doubled in that time. That is not a modest hurdle — it is asking the business to prove, over an extended period, that its growth is translating into shareholder value at an exceptional rate. The companies that clear this bar are not simply growing; they are compounding. The output drops to 17 stocks, which is a real portfolio: each position carries meaningful weight, retention can be tracked properly, and individual performance actually matters.
Seventeen stocks is not too few. It is focused. Each holding represents roughly 6% of the portfolio at equal weight — enough to matter, not so much that a single name is an existential threat. The screen's other six variables are already doing significant diversification work: mid-cap only, low debt, high margins, multi-year growth. The 17 names that survive all seven filters are not a random cluster — they are a specific kind of business, selected consistently.
The One Thing to Watch
There is a honest caveat worth naming. A 30% EPS growth filter applied to a screen already demanding 20% revenue growth and 15% net margins tends to cluster in a specific type of company. Software, specialty healthcare, certain financial technology businesses — sectors where earnings can genuinely compound at 30%+ because the marginal cost of growth is low and the operating leverage is high. This is not a flaw in the screen, but it is something to be aware of: the 17 companies that pass may be more correlated with each other, and with the NASDAQ, than their sector labels suggest. In a broad growth selloff they may move together in ways that a sector-diversified portfolio would not.
That is not a reason to change the filter. It is a reason to track sector composition when the screen is run, and to note it when reporting results. A concentrated, high-conviction screen that is aware of its own correlations is more useful than a diffuse one that pretends to be diversified when it is not.
The Updated Screen
Seven variables. Seventeen stocks. The logic is complete: size, equity returns, debt discipline, revenue growth, liquidity, profit margins, and now earnings trajectory at a threshold that actually bites. Nothing added for the sake of adding. One gap, one fix.
Strategy 4 · Updated Variables
The next step is to run this screen at the next snapshot, record the 17 names, and begin tracking it the same way the other strategies in this journal are tracked — retention rate, period returns, overlap with other screens, cumulative performance against the index. The screen has a logic now. The data will tell us whether the logic holds.