Stock Selection Model

Investing Strategies
1

Dear All,

Hope you are taking good care of yourselves and your families.

I have been working on a Stock Selection Framework for myself for sometime now.

It’s supposed to give us shortlists for Multi-Baggers in any geography once it’s complete.

Here is the draft of the Pole Star Stock Selection Model ^

I have put various parameters into 7 buckets.

L - Large - Sufficiently Large market cap, large market share, large revenues, large profits, large ROCE, large ROE, large CFO and FCF generation.

A - Adaptable - Adaptable and growing for last 5-10-20 years continuously. Growing Sales, Growing Profits, Growing EPS.

S - Strong - Zero debt, high cash flow generation from operations, no pledging of shares - strong balance sheet. strong cash flows

T - Tough - When market goes down, they don’t go down that much. They find new ways to generate business in tough times and cut costs, thereby increasing top line and bottom line both. They are able to find favourable long-term economics

I - Innovative - Innovative use cases, innovative products, innovative marketing, innovative distribution

N - New - Entering into New Categories, New Products, New grographies or creating New Markets - all boost growth in EPS (earnings) and expansion in PE multiple

G - Great - Great, expert, clean, and trustworthy management, Great Culture, Great Brands

Ideally, LASTING companies at good prices should be the key to long term investment heaven.

Please give me your feedback as I try to fine-tune my model.

Are there any parameters you would want me to include? Are there any parameters you think should not be in this model? What has been your experience in searching for holy grail?

Please note that this is for my own education, and not for giving investment advice to anyone.

Moderators, this is the first topic I am creating here. If it is misplaced/against community rules, please let me know and I will move it around/delete it.

12 Likes
2

Hey Zuhaib,

Great to see the framework and most likely hoping that it has evolved as the market has changed!

I have got a couple of questions: -

A. L i.e. large, is there any specific preference you have towards large cap companies/stocks given this inclination maybe linked to your risk appetite. In general, my belief is that a food opportunity can pop up across market caps and it is the combination of strong growth, relatively lower risk and health projections of cash flow which can be a significant driver of capital appreciation.

B. A i.e. adaptable is not the same as a growing business for me. For a business to be adaptable it needs to be cognizant of the fact that its strong run in the current segment/service/product is coming to an end and it must be proactive enough to allocative free cash flows into innovative RND/investments which drive topline and generate good returns on capital. Glad to hear your opinions on the same.

C. S i.e. strong for you means “No debt”. Again, if it is linked to your personal risk appetite, fine by me but there are many businesses where Companies have taken debt to pump in working capital which are good businesses. Good cash flows and range bound leverage may still work. Would love to hear your opinions on the same.

Additionally, how do you measure qualitative attributes like “G” or “I”. Would love to know:)

S: For S, zero debt is a very rigid