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1/ Is this company high-quality? (Thread)
Many factors to consider -- why checklists are amazing!
Here's my step-by-step process for figuring that out
Many factors to consider -- why checklists are amazing!
Here's my step-by-step process for figuring that out
2/ Score overview:
2 step process
Step 1: 100 points total, weighed by importance
Categories & max score:
Financials: 17
Moat: 20
Potential: 18
Customers: 10
Revenue: 10
Mgmt/Culture: 14
Stock: 11
Step 2 will be covered in another thread (I ran out of tweets)
2 step process
Step 1: 100 points total, weighed by importance
Categories & max score:
Financials: 17
Moat: 20
Potential: 18
Customers: 10
Revenue: 10
Mgmt/Culture: 14
Stock: 11
Step 2 will be covered in another thread (I ran out of tweets)
3/ Financial:
Q: All things equal, would you rather have a cash-heavy balance sheet or debt-heavy?
A: Cash-heavy
0 - 5 possible
0 - tons of debt, 0 cash
1
2
3
4
5 - tons of cash, 0 debt
Q: All things equal, would you rather have a cash-heavy balance sheet or debt-heavy?
A: Cash-heavy
0 - 5 possible
0 - tons of debt, 0 cash
1
2
3
4
5 - tons of cash, 0 debt
4/ Financial:
Q: All things equal, would you rather have a high gross margin or a low gross margin?
A: High gross margin
0 - 3 possible
0 <50% GM
1
2
3 >80% GM
+1 if rising, -1 if falling
Q: All things equal, would you rather have a high gross margin or a low gross margin?
A: High gross margin
0 - 3 possible
0 <50% GM
1
2
3 >80% GM
+1 if rising, -1 if falling
5/ Financial:
Q: All things equal, would you rather have high ROE, ROA, ROIC, or low?
A: High
0 - 3 possible
0 - negative ROE, ROA, ROIC
1
2
3 - 15%+ ROE, ROA, ROIC
+1 if rising, -1 if falling
Q: All things equal, would you rather have high ROE, ROA, ROIC, or low?
A: High
0 - 3 possible
0 - negative ROE, ROA, ROIC
1
2
3 - 15%+ ROE, ROA, ROIC
+1 if rising, -1 if falling
6/ Financial:
Q: All things equal, would you rather have positive free cash flow or negative?
A: Positive
0 - 3 possible
0 - Negative FCF
1
2
3 - Positive FCF and growing fast
Q: All things equal, would you rather have positive free cash flow or negative?
A: Positive
0 - 3 possible
0 - Negative FCF
1
2
3 - Positive FCF and growing fast
7/ Financial:
Q: All things equal, would you rather have positive EPS or negative?
A: Positive (I'm OK w/ non-GAAP)
0 - 3 possible
0 - Negative EPS
1
2
3 - Positive EPS and growing fast
Q: All things equal, would you rather have positive EPS or negative?
A: Positive (I'm OK w/ non-GAAP)
0 - 3 possible
0 - Negative EPS
1
2
3 - Positive EPS and growing fast
8/ Moat
Q: All things equal, would you rather have a wide moat or no moat?
A: Wide moat
0 - 15 possible
Sources:
Network Effect
Switching Costs
Low-cost
Intangible
Counter-positioning
Q: All things equal, would you rather have a wide moat or no moat?
A: Wide moat
0 - 15 possible
Sources:
Network Effect
Switching Costs
Low-cost
Intangible
Counter-positioning
9/ Moat:
Q: All things equal, would you rather have a widening moat or narrowing moat?
A: Widening
0 - 5 possible
0 - Moat narrowing rapidly
1
2
3
4
5 - Moat widening rapidly
Q: All things equal, would you rather have a widening moat or narrowing moat?
A: Widening
0 - 5 possible
0 - Moat narrowing rapidly
1
2
3
4
5 - Moat widening rapidly
10 / Potential
Q: All things equal, would you rather have lots of optionality or none?
A: LOTS!
0 - 7 possible
0 - No optionality in 10+ years
1
2
3
4 - Optionality within current markets
5
6
7 - High optionality in new markets (Like $TSLA w/ energy or $AMZN w/ AWS)
Q: All things equal, would you rather have lots of optionality or none?
A: LOTS!
0 - 7 possible
0 - No optionality in 10+ years
1
2
3
4 - Optionality within current markets
5
6
7 - High optionality in new markets (Like $TSLA w/ energy or $AMZN w/ AWS)
11 / Potential
Q: All things equal, would you rather have lots of organic growth or none?
A: LOTS!
0 - 4 possible
0 - All growth from M&A
1
2
3
4 - 15+% growth all organic
Q: All things equal, would you rather have lots of organic growth or none?
A: LOTS!
0 - 4 possible
0 - All growth from M&A
1
2
3
4 - 15+% growth all organic
12/ Potential
Q: All things equal, would you rather have a 'top dog & first mover' or not?
A: Top dog & first mover (or industry disruptor)
0 - 3 possible
0 - 4th+ place company
1
2
3 - Top dog and first-mover
Q: All things equal, would you rather have a 'top dog & first mover' or not?
A: Top dog & first mover (or industry disruptor)
0 - 3 possible
0 - 4th+ place company
1
2
3 - Top dog and first-mover
13/ Potential
Q: All things equal, would you rather have lots of operating leverage ahead or none?
A: LOTS!
0 - 4 possible
0 - Negative operating leverage ahead
1
2
3
4 - Tons of operating leverage ahead
Q: All things equal, would you rather have lots of operating leverage ahead or none?
A: LOTS!
0 - 4 possible
0 - Negative operating leverage ahead
1
2
3
4 - Tons of operating leverage ahead
14/ Customers
Q: All things equal, would you rather have high marketing costs or NO marketing costs?
A: No marketing costs
0 - 5 possible
0 - Very expensive to onboard customers
1
2
3
4
5 - $0 spent to acquire customers
Q: All things equal, would you rather have high marketing costs or NO marketing costs?
A: No marketing costs
0 - 5 possible
0 - Very expensive to onboard customers
1
2
3
4
5 - $0 spent to acquire customers
15/ Customers
Q: All things equal, would you rather have cyclical demand or recession-proof demand?
A: Recession-proof demand
0 - 5 possible
0 - Demand very cyclical
1
2
3
4
5 - Demand recession-proof
Q: All things equal, would you rather have cyclical demand or recession-proof demand?
A: Recession-proof demand
0 - 5 possible
0 - Demand very cyclical
1
2
3
4
5 - Demand recession-proof
16/ Revenue
Q: All things equal, would you rather recurring revenue or one-off sales?
A: Recurring revenue!
0 - 5 possible
0 - Customers are consumed
1
2
3
4
5 - Customers buy monthly
Q: All things equal, would you rather recurring revenue or one-off sales?
A: Recurring revenue!
0 - 5 possible
0 - Customers are consumed
1
2
3
4
5 - Customers buy monthly
17/ Revenue
Q: All things equal, would you rather have pricing power or not?
A: Pricing power!
0 - 5 possible
0 - No control over pricing
1
2
3
4
5 - Can raise prices at will
Q: All things equal, would you rather have pricing power or not?
A: Pricing power!
0 - 5 possible
0 - No control over pricing
1
2
3
4
5 - Can raise prices at will
18/ Management
Q: All things equal, would you rather have a founder or a new hired gun CEO?
A: Founder!
0 - 4 possible
0 - New CEO, no tenure at the company
1
2
3 - Long tenure CEO
4 - Founder
Q: All things equal, would you rather have a founder or a new hired gun CEO?
A: Founder!
0 - 4 possible
0 - New CEO, no tenure at the company
1
2
3 - Long tenure CEO
4 - Founder
19/ Management
Q: All things equal, would you rather have high insider ownership or none?
A: High
0 - 3 possible
0 - <1% insider ownership
1
2
3 - >5% insider ownership
(Points awarded for $10+ million in stock holdings)
Q: All things equal, would you rather have high insider ownership or none?
A: High
0 - 3 possible
0 - <1% insider ownership
1
2
3 - >5% insider ownership
(Points awarded for $10+ million in stock holdings)
20/ Management
Q: All things equal, would you rather have a good place to work or a bad place to work?
A: Good place to work
0 - 4 possible
0 - <2.5 stars on Glassdoor
1
2
3
4 - >4 stars on Glassdoor
Q: All things equal, would you rather have a good place to work or a bad place to work?
A: Good place to work
0 - 4 possible
0 - <2.5 stars on Glassdoor
1
2
3
4 - >4 stars on Glassdoor
21/ Management
Q: All things equal, would you rather have a great mission statement or none?
A: Great mission statement!
0 - 3 possible
0 - No mission
1
2
3 - Mission that is simple, inspirational, and optionable
Q: All things equal, would you rather have a great mission statement or none?
A: Great mission statement!
0 - 3 possible
0 - No mission
1
2
3 - Mission that is simple, inspirational, and optionable
22/ Stock
Q: All things equal, would you rather have stock that has crushed the market or lost badly?
A: Crushed!
0 - 4 possible
0 - Lost by 100% to market over 5 years (or since IPO)
1
2
3
4 - Beat market by 100%+ over 5 years (or since IPO)
Q: All things equal, would you rather have stock that has crushed the market or lost badly?
A: Crushed!
0 - 4 possible
0 - Lost by 100% to market over 5 years (or since IPO)
1
2
3
4 - Beat market by 100%+ over 5 years (or since IPO)
23/ Stock
Q: All things equal, would you rather have buybacks, dividends, and debt repayments or not?
A: Yes!
0 - 3 possible
0 - No buyback, no dividends, no debt repayments
1
2
3 - Buybacks, dividends, debt repayments
Q: All things equal, would you rather have buybacks, dividends, and debt repayments or not?
A: Yes!
0 - 3 possible
0 - No buyback, no dividends, no debt repayments
1
2
3 - Buybacks, dividends, debt repayments
24/ Stock
Q: All things equal, would you rather have a company that beats estimates or misses them?
A: Beats!
0 - 4 possible
0 - Regularly misses expectations
1
2
3
4 - Regularly beats expectations
Q: All things equal, would you rather have a company that beats estimates or misses them?
A: Beats!
0 - 4 possible
0 - Regularly misses expectations
1
2
3
4 - Regularly beats expectations
25/
We now have a pre-gauntlet score!
Great results - Above 80
OK result - 60 - 80
Terrible result - Below 60
(New thread on Gauntlet coming soon)
We now have a pre-gauntlet score!
Great results - Above 80
OK result - 60 - 80
Terrible result - Below 60
(New thread on Gauntlet coming soon)
