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%
- Revenue Growth > 7% (Key Driver of Long-Term Stock Performance)
- Earnings/EPS Growth > 10%
- 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 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)
- 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
- 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
- In which different segments does the company make money
- How does the geographical split look like
- Which Insiders are buying their own stock
- Check ROIC curve of the last 10 Years
- CAPEX/Sales < 5%
- CAPEX/Operating Cash Flow < 15%
- Interest Coverage Ratio (EBIT/Interest payments) > 10
- Net Debt / Free Cash Flow < 4
- Gross margin > 30
- FCF margin > 20
- Yearly revenue growth > 5%
- Yearly earnings growth > 7%
- Secular trend (urbanization, aging, cybersecurity, obesity, digital payments, …)