Selected Companies

AI Prompt: Individual Stock Analysis

Generate a detailed investment research report on COMPANYNAME (COMPANYTICKER). The report should be structured for investors and traders, providing actionable insights.

Key Report Sections:

1. Company Overview and Business Model: Briefly describe COMPANYTICKER's core business, target markets, and key operational areas.

2. Strengths:

Identify and elaborate on COMPANYTICKER's competitive advantages.
Discuss strong financial metrics, market positioning, or unique business strategies.

3. Weaknesses:

Outline any operational inefficiencies, market vulnerabilities, or less favorable financial trends.
Address potential areas of concern for investors.

4. Risks:

Categorize and explain significant risks (e.g., credit risk, interest rate risk, regulatory risk, macroeconomic risk, competition).
Assess the potential impact of these risks on COMPANYTICKER's performance.

5. Competitors and Competitive Landscape:

Identify COMPANYTICKER's primary competitors in its key markets.
Perform a comparative analysis, highlighting how COMPANYTICKER differentiates itself or where it might lag.

6. Growth Potential:

Analyze historical growth trends (revenue, earnings, loan growth).
Discuss future growth drivers, strategic initiatives, and market opportunities.
Assess its potential as an acquisition target, considering its market niche, balance sheet, and strategic value.

7. Valuation:

Relative Valuation: Compare COMPANYTICKER's key valuation multiples (e.g., P/E, P/B, P/S) against its closest peers and industry averages. Provide a clear conclusion on whether it appears over or undervalued relative to its sector.
Absolute Valuation (Earning Power): Conduct an absolute valuation using an appropriate methodology (e.g., Discounted Earnings, Dividend Discount Model, or a simplified earnings power multiple). State assumptions clearly and arrive at a target intrinsic value range.

8. Overall Quality Conclusion:

Based on the analysis of strengths, weaknesses, risks, and growth, provide a concise conclusion on the overall quality of COMPANYTICKER as an investment. This should reflect its financial health, management effectiveness, and market position.

9. Investment and Trading Strategy Recommendation:

Provide a clear and actionable recommendation: Buy, Hold, or Sell.
Outline a comprehensive investment strategy, including:
- Entry Points: Suggest optimal price levels for initiating a position.
- Exit Points/Price Targets: Recommend price levels for taking profits or re-evaluating.
- Risk Management: Propose stop-loss levels or other risk mitigation techniques.
- Time Horizon: Specify whether the recommendation is for short-term trading, medium-term investing, or long-term holding.
- Catalysts: Identify potential events or news that could impact the stock price.

Report Format: The report should be well-organized with clear headings and bullet points where appropriate. Use a professional and analytical tone.

Company Selection Strategy

Step 1: The Quality Screen (The Absolute Moat Filter)

This is our non-negotiable first step. We are not comparing companies yet; we are holding them to an absolute, high standard of business quality. A company must pass all of these tests to be considered a potential "compounder." This is where we filter out the vast majority of the market.

Metric	Threshold	Why It's Critical (The "Gauntlet" Entrance)
1. Return on Invested Capital (ROIC)	> 15% (5-yr average)	This is the single most important metric. It is a truer measure of profitability than ROE, as it includes debt financing. A high and stable ROIC is the clearest quantitative sign of a durable competitive advantage, or "moat."
2. Gross Margin	> 40%	Refined Metric. High gross margins indicate pricing power and a differentiated product. Software companies should be >70%; industrial companies might be lower, but we still demand a healthy margin.
3. Debt-to-EBITDA	< 3.0x	Refined Metric. Debt-to-Equity can be misleading in asset-light businesses. Debt-to-EBITDA is a pure cash flow leverage metric, ensuring the company has a fortress balance sheet.
4. FCF Conversion Rate	> 80% (5-yr average)	Unchanged. This ensures reported earnings are real and backed by cash, filtering out companies with aggressive accounting.

Action: Run your entire universe of stocks through this demanding four-point screen. The very small list of companies that emerge are the truly elite businesses.

Step 2: The Growth & Momentum Scorecard (The Relative Engine Ranking)

For the elite companies that passed Step 1, we now want to identify which ones have the strongest momentum and growth prospects. This is where we integrate your disciplined, peer-comparison methodology. We will rank the "survivors" against each other.

The Growth & Momentum Scorecard:

Metric	What It Measures	How to Score It	Weight
1. Revenue Growth (3-yr CAGR)	The demand for the company's products/services.	Rank from highest to lowest. Top quartile gets 3 points, second quartile 2, third 1, bottom 0.	50%
2. EPS Growth (3-yr CAGR)	Profit growth and operating leverage.	Rank from highest to lowest. Top quartile gets 3 points, second 2, etc.	30%
3. FCF Yield	Cash generation relative to price.	Rank from highest to lowest. Top quartile gets 3 points, second 2, etc.	20%

Calculate the Weighted Score. The companies in the top half of this ranking represent the best of the best: high-quality businesses with proven, accelerating growth.

                            Why this is superior:
                            Sequencing: We only look at growth after confirming quality. This prevents us from chasing fast-growing but fragile businesses.
Weighted System: Top-line revenue growth is the hardest thing for a company to achieve and the purest sign of market acceptance, so we give it the highest weight.
FCF Yield over P/E: FCF yield is a cleaner, cash-based valuation metric that is harder to manipulate than earnings. It tells us how much cash the business generates relative to its price.

                        

Step 3: The Qualitative Gauntlet (The "Why" Test)

This is where human judgment becomes paramount. For the top-ranked companies from Step 2, we must understand the story behind the numbers.

The Moat: Can you clearly articulate the competitive advantage in one sentence? (Network effects, high switching costs, brand, etc.) Is that moat widening or shrinking?
Capital Allocation: Read the last two shareholder letters. Does the CEO talk about ROIC and think like an owner? Do they have a track record of intelligent acquisitions and timely share buybacks? This is a crucial, forward-looking indicator.
Reinvestment Runway: What is the Total Addressable Market (TAM)? Does the company have a clear path to reinvest its cash flow at high rates of return for the next 5-10 years?

Step 4: The Valuation Gate (The Final Decision & Margin of Safety)

We have identified the best businesses with the strongest momentum. Now, and only now, do we perform a rigorous, independent valuation to determine our entry point. We completely separate the analysis of the business from the price of the stock.

Valuation Method	Action & Thresholds
Primary: Discounted Cash Flow (DCF)	Build a conservative 10-year FCF model. This forces you to get your hands dirty and make explicit assumptions about the business's future. The output is your estimate of Intrinsic Value.
The Buy Trigger	Demand a Margin of Safety. We will only initiate a position when the current market price is at a 25% discount to our calculated Intrinsic Value. This provides a buffer against errors in our judgment and market volatility.
Secondary (Sanity Check): Reverse DCF	What growth rate is the market pricing in? Use the current stock price as the fair value and solve for the required FCF growth rate. If the market is pricing in 20% growth for the next decade and you think 15% is more realistic, the stock is overvalued. This is a powerful check against irrational exuberance.

The Enhanced Strategy in Action

1. Screen

Start with 1,000 large-cap stocks. The "Quality Screen" brutally filters this down to just 40 elite businesses.

2. Score & Rank

The "Growth & Momentum Scorecard" is applied to the 40 survivors. We identify the top 15 with the best combination of quality and growth.

3. Vet

We conduct deep qualitative due diligence on these 15. We eliminate 5 whose moats are questionable or whose management seems undisciplined, leaving 10 "Quality Compounders."

4. Buy

We build a DCF for each of the 10 companies. We find that 3 are currently trading at a >25% discount to our conservative intrinsic value estimate. These are our buy candidates. The other 7 are placed on a "farm team" watchlist.

Strategy Summary

This Company Selection Strategy combines the best of both approaches. It uses absolute standards to ensure quality, a relative ranking system to identify elite performers, and a disciplined, separate valuation gate to ensure we buy great businesses at a fair price. This is how you systematically build a portfolio of the strongest companies while protecting yourself from value traps and undue risk.