Let’s recap what we’ve learned so far. We’ve realized that instead of constantly changing your target list, it makes sense to maintain a relatively stable investment universe whose members meet your fundamental criteria. You should aim to curate a shortlist of “investable universe” containing outstanding companies that you closely follow. You can then allow Mr. Market to do its job with its bipolar ups and downs, hoping that sentiment shifts in your favor by offering a few of the candidates in your investable universe for sale.
We’ve also seen that quantitative screening is just the beginning and not the end, even though it can provide valuable inputs for an investment process. The list of companies that match your screening criteria is only the starting point; this is where the comprehensive qualitative analysis begins.
This way, you can form an educated opinion and make a contrarian bet at the point when you have an unwavering understanding of the underlying business, differentiating between temporary challenges and existential threats. This concept aligns with the saying that success occurs when opportunity meets preparation.
Now, onto the most challenging part.
Let’s suppose you agree with the laid-out process so far and would like to set sail to navigate it on your own. Great!
First, you want to rely on the best fundamental data to build your financial models, right?
You have the option to calculate this data manually for your targets, which would entail an Excel sheet with over a thousand lines for each company. Not so charming, is it?
And even then, you won’t have the ability to conduct a screening, as you lack a tool that can filter through years of historical data for thousands of public companies. Therefore, the only viable option is a data provider, which comes with a significant cost, often in the tens of thousands of dollars, as this is the price tag for institutional-level metrics.
Let’s assume we have taken care of this step for you…
Now you’re prepared to dive into what your screener identifies and put in the rigorous effort to separate the outstanding from the mediocre, compiling a list of truly high-quality compounders that will form the foundation of your investment universe. Just to give you an idea: our team of three analysts spent three full years completing the qualitative assessment of 60 EVA Monster candidates. If you’re doing it on your own, this adds up to a demanding decade of full-time work. Furthermore, you might have to start anew as some of the information you’ve gathered will inevitably become outdated over time.
As astonishing as this may sound, we hope that your passion for individual stocks still burns brightly, and that you’re not fond of the idea of entrusting your money to a fund manager for high fees (and the likelihood of underperformance). You probably don’t want to passively invest all your money with no control, do you?
The good news is there’s a shortcut. As a subscriber to the FALCON Method Newsletter, you gain instant access to:
- The full list of approximately 60 quality-growth-focused EVA Monster candidates, updated yearly to incorporate new promising entries and eliminations as our conviction wanes.
- On top of that, a monthly execution of our value-focused screening process, searching for “Fallen Angel” value opportunities from a preselected universe, based on a solid dividend history.
- A monthly newsletter featuring a complete factsheet of the 10 most promising targets, including the top “EVA Monster” and “Fallen Angel” prospects, exclusively ranked by our modeled 5-year total return potential.
- A list of our top picks each month, where we have the highest conviction and invest our capital.
- An educational-focused opening piece designed to enhance your skills as an investor by offering timeless lessons on the market, insights into investment psychology, as well as our efforts to broaden your circle of competence by shedding light on secular trends, or business case studies.
Here is an excerpt from the opening piece of the November 2023 issue, which explains how our contrarian bet on Meta played out by emphasizing the crucial aspects of its fundamental puzzle:
”Meta served as the perfect example of how a company can respond to challenges in a moat-enhancing way. Handling the Apple privacy issue with in-house machine learning solutions, fending off the emerging threat from TikTok, and actively preparing for the next wave of computing platform change all made the business more resilient. While the stock was punished, sub-$100 Meta was doing all the right things to defend and even strengthen its moat, which was well rewarded by now. Again, competitive dynamics drive stock prices; it’s just not easy to measure and monitor them.”
As a final takeaway, here is a quick recap of the 7 steps of the FALCON Method:
Step#1: Screen for Top-Quality
When a business consistently earns high returns on its invested capital and operates with spectacular margins (measured by the percentage of sales resulting in real economic profit), these are telltale signs of an existing moat.
Step#2: Growth is needed to drive performance
To qualify as a truly outstanding business, a top-quality company must also have growth opportunities that allow it to reinvest most of its cash flows at high rates of return.
Step#3: Introducing the EVA Monsters
Quality alone is not sufficient, while growth without quality is exceedingly risky. However, the combination of quality and growth offers phenomenal performance.
Step#4: The windshield approach to rank the Monsters
While we selected the members of this elite group with the help of historical data, we use forward-looking modeling to determine which of them are the most promising investment candidates and are thus worthy of our attention.
Step#5: Read, read, read… The qualitative aspects
Once we have those polished Excel models, we delve deep to gain a better understanding of the business. Our primary focus points in the analysis include the sources and sustainability of the moat, capital allocation, the drivers of growth, and management’s integrity.
Step#6: Fine-tuning and Conviction
We determine two entry price levels. The first (and higher) one is the buy price with the potential to provide a 15% annualized total return over a 5-year timeframe, assuming our assessment of the firm’s fundamental performance is accurate and the valuation remains within its typical historical range. We also establish a lower, very conservative entry price, which we refer to as our “5-star” or “punchcard” price.
Step#7: Who could beat the highest-ranking Monsters?
By this stage, we know exactly which EVA Monsters (quality-growth stocks) present the most attractive opportunities in the market. Rather than just publishing this valuable list every month in the FALCON Method Newsletter, we make additional efforts to explore another segment of the stock market that sometimes yields hidden gems. While quality and growth are the key factors for EVA Monsters, it is the valuation that drives returns for these once-beloved dividend darlings now found in the bargain bin. This is why we call this category “Fallen Angels.”
Upon completing Step #7, we have the list of the most attractive stocks for investment, and our process has reached its ultimate goal.
The Falcon Method Newsletter is your trusty companion, bringing you top 10 stock picks every month straight to your inbox. Say goodbye to endless hours of market analysis and hello to reliable passive income, long-term growth, and peace of mind.
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