5 Cheap Quality Businesses🏰
Quality at a reasonable price is a great investing strategy 🧠
Hi partner! 👋🏻
This article examines the 5 cheapest companies on the quality growth portfolio’s watchlist.
Finding the best combination of quality, growth, and valuation is the recipe we use to achieve great results in the stock market.
Quality at a reasonable price is a great investing strategy:
Quantitative Measurement of Quality, Growth and Valuation
We use 3 main factors to determine the attractiveness of an investment: “Quality”, “Growth”, and “Valuation”:
Measuring quality:
Gross Margin +40%
Operating Margin +10%
Return on Invested Capital +8%
Free cash flow / Net income +40%
Measuring growth:
Revenue 5-year CAGR +5%
EPS 5-year CAGR +5%
Free cash flow 5-year CAGR +5%
Revenue 2 year forward +7%
EPS 2 year forward +7%
Measuring the valuation:
Forward price-to-earnings ratio <30x
Forward Free-cash-flow Yield >2,5%
Discounted cash flow analysis: Undervalued
Point-based system to determine the attractiveness of an investment
Assigning points based on quantitative inputs is a good way to determine if a company looks attractive quickly. However, this analysis alone should not be used as a basis for investment. We need to look at multiple factors on the qualitative side to determine if a business is worth investing in (This will be covered in another article). This includes:
If you want to learn more about how to analyze businesses to improve your investing, sign up for our waitlist for our Digital Course:
Proposed point-based system to identify great investments:
Before we get into the 5 Cheap Quality businesses and score them with the point system above, I want to share our Watchlist Sheet with you, with 28 companies that we follow closely (The sheet includes all the data points above):