Thanks to feedback and refining my process, I updated my stock screener to be more nuanced...here is the update
The Four Pillars
1. Solvency and balance sheet
Question: Can a company survive difficult economic conditions?
(I split this into a two parter since it couldn't gauge the finacial sector)
Non financial: Interest coverage ratio greater than 4x or cash exceeds total debt
Financial sector: CET1 capital ratio greater than 10%
This step is designed to eliminate businesses whose debt levels could become a major risk during recessions, rising interest rates, downturns
2. Cash Generation & Business Quality
Question: Does the company produce real cash and operate efficiently?
Non financial; positive FCF and gross margins over 20%
Financials: positive operating cash flow / Net Income. Efficiency ratio below 60%
This filter focuses on companies that are not merely reporting accounting profits but are actually generating money while mainting healthy economics.
3. Top-Line Momentum
Question: is the business still growing?
Requirement: Revenue growth above 10% year over year
This prevents capital from being allocated to stagnant businesses and identifies companies benefiting from secular trends, expanding markets, or increasing market share. Revenue growth is used because it is much harder to manipulate than earnings.
4. Valuation Guardrail
Question: Is the market asking asking a reasonable price for these fundamentals?
Requirement: FCF yield above 4% - calculated as FCF + Market Capitalization
This step protects against overpaying for excellent companies. By using FCF from company filings instead of analyst projections.
Scoring and Decision Process
4/4 - moves to primary sandbox and 14 day waiting period to research further
3/4 - see the tiebreaker
2/4 or less - fail and discard
Tiebreaker- look at ROIC....Return on Invested Capital > 15%
The rationale is that exceptional companies deserve consideration even when metrics, usually valuation, is temporarily out of range. High ROIC demonstrates management ability to compound shareholder capital at attractive rates
I removed the PEG filter with FCF Yield and I lowered the growth requirement
This new screener allows company like GOOG, V, MA, ABBV through which I think makes sense...they aren't the kinda companies im necessarily looking for because they are so obvious, but it makes sense that they should be able to pass
I also lowered the growth requirement from 40% down to 10% because I still want good growing companies, but i took feedback and 40% was way too harsh
The Tiebreaker also allows for good companies to get through, but i still dont want to be so lax that most companies get through. As I explained, im lookkng for companies still worth my limited research time.
Ive noticed that this is a good filter for midcap companies...some noticeable midcap companies that passed were CHWY and HUBS...newly eliminated companies i tried were NOC, SYK, TMO, BMY, MRK, PFE, BA, C, DD.
On some Tiebreaker companies, ive had some borderline pass/fails, but in my world a maybe is a no.
I tried other mid and small caps that got eliminated, but i dont remember the tickers
Again, this isnt a binary invest/pass...its a starting point for me to do my research further
And I wrote this whole post myself, no AI used to clean up for clarity.