Cheat-Sheet Quality Stocks - How to find True Value

Backtested recommendations for Investors ✓ What to look for in a Stock that succeeds: ROIC, Margins, Growth Valuations, Debt Valuations and more.

Generic Recommendations

  • Average Volume > 100,000 (> 1,000,000 for Options)
    The average daily traded shares over the past 3 months should be larger than 100,000. This lowers the spread and makes it easier to find a seller/buyer in time.
  • Market Cap > $300 Million (> $1,000 Million for Options)
    Nano cap stocks should be excluded to make sure that the share price cant be manipulated with pump and dump schemes.
  • Price > $7
    Penny stocks should be excluded due to possible information issues and manipulation of these stocks.
  • Age > 2 years
    At least two fiscal years or 8 quarters of fundamental data (balance-, income- and cash-flow sheets) should be available for research.

True Value / Questions

Profitability
  • ROIC > 15%
  • Profit Margin > 10%
  • FCF / Earnings > 80%
Growth
  • Revenue Growth > 7% (Key Driver of Long-Term Stock Performance)
  • Earnings/EPS Growth > 10%
Debt
  • Net Debt / EBITDA < 3
  • Net Debt / FCFF < 3
  • Debt / Equity < 80%
  • RoIC > WACC
Before you trigger the button:
How this company could loose value?

Take the opposite position and evaluate the risks, not just the chances.

We make money by not loosing it

How to identify a Compounding Machine in the earning sheets?

Business
  • Low volatility of margins
    (todo)
  • Pricing power
    (todo>
  • Low Capital Intensity
    CAPEX/Sales < 5% and CAPEX/Operational Cash Flow < 15%
  • Cash Flow Returns on investment (CFROI)
    (todo)
Ownership
  • Skin in the Game
    Owner & Family > 20% of shares

How to identify a Compounding Machine, if its not in the earning sheets?

Business
  • Moat
    Sustainable, high Return on Invested Capital (ROIC > WACC)
    by recurring revenues, high gross margins and low capital intensity
  • Pricing Power
    Best CAPEX/Sales in Peer-Group
Capital Allocation
  • Pattern of disciplined Reinvestments
  • Extensive opportunities to reinvest
    Reinvest for organic growth (ROIC > 20%, ROIC YoY)
    Acquisitions (hard to predict which M&A createa value; 60%-90% don't)
    Share buybacks
    Dividends 20% - 25% of EPS (in absence of value creating alternatives)

How to analyze a stock

Understand the product
  • Annual Reports
  • Investor Presentations, Shareholder Letters
Revenue split
  • In which different segments does the company make money
  • How does the geographical split look like
Skin in the game
  • Which Insiders are buying their own stock
Moat
  • Check ROIC curve of the last 10 Years
Capital intensity
  • CAPEX/Sales < 5%
  • CAPEX/Operating Cash Flow < 15%
Financial health
  • Interest Coverage Ratio (EBIT/Interest payments) > 10
  • Net Debt / Free Cash Flow < 4
Profitability
  • Gross margin > 30
  • FCF margin > 20
Historical growth
  • Yearly revenue growth > 5%
  • Yearly earnings growth > 7%
Outlook
  • Secular trend (urbanization, aging, cybersecurity, obesity, digital payments, …)

Position Sizing