We view stock evaluation as the intersection of accounting analysis, experience, wisdom and art.
We do not believe in the ability to read a chart and see into the future, but we do believe in the ability to analyse charts in aid of increasing the margin of safety, a principle of investing in which an investor only purchases securities when their market price is significantly below their intrinsic value
Stock Valuation Algorithm Criteria in 10 Steps
(Note: The goal is to refine an algorithm to project the theoretical future value of a stock based on the criteria listed below and then to calculate an appropriate buy price within a reasonable margin of safety)
(Note: The goal is to refine an algorithm to project the theoretical future value of a stock based on the criteria listed below and then to calculate an appropriate buy price within a reasonable margin of safety)
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Step 1: Price to Book Value Per Share
Green Flag: If the Price to book is <1
Green Flag: if the Book Price is going up.
Red Flag: If the book price is going down.
Green Flag: If the Price to book is <1
Green Flag: if the Book Price is going up.
Red Flag: If the book price is going down.
Step 2: Profit Margin
Green Flag: If the Profit Margin >20 (typically banks, resource and tech stocks)
Golden Flag: If the Profit Margin + the earnings yield >30 (referred to as Greenblatt' s Magic Formula)
Green Flag: if the Profit Margin is going up.
Red Flag: If the Profit Margin is going down.
Green Flag: If the Profit Margin >20 (typically banks, resource and tech stocks)
Golden Flag: If the Profit Margin + the earnings yield >30 (referred to as Greenblatt' s Magic Formula)
Green Flag: if the Profit Margin is going up.
Red Flag: If the Profit Margin is going down.
Step 3: Debt to Cashflow (DC)
If the DC < 40
Red Flag: If the DC > 60
Green Flag: if the DC is going downwards.
Red Flag: If the DC is going upwards.
If the DC < 40
Red Flag: If the DC > 60
Green Flag: if the DC is going downwards.
Red Flag: If the DC is going upwards.
Step 4: Dividends
Green Flag: If the dividend is above 4% and is easily covered by earnings
Green Flag: If the dividend amount is going upwards.
Red Flag: If the dividend amount is going downwards.
Note: Its preferred to be overweighted with dividend stocks during a market downturn, as you can use the dividends to buy back the stock at a lower price, supercharging your gains for the next (inevitable) market upturn.
Green Flag: If the dividend amount is going upwards.
Red Flag: If the dividend amount is going downwards.
Note: Its preferred to be overweighted with dividend stocks during a market downturn, as you can use the dividends to buy back the stock at a lower price, supercharging your gains for the next (inevitable) market upturn.
Step 5: Earnings, P/E
Green Flag: Earnings been rising during the last 3 years and look to rise this year and next year
Green Flag: The latest quarterly earnings has surprised to the upside.
Green Flag: This years earnings has been revised upwards.
Green Flag: Next years earnings has been revised upwards.
Golden Flag: All three lines above show upwards revisions.
Red Flag: All three lines above show downwards revisions.
Green Flag: P/E <12
Red Flag: P/E > 30
Green Flag: Present P/E is lower than the average P/E over the last 5 years
Red Flag: Present P/E is higher than the average P/E over the last 5 years (unless earnings are rising)
Green Flag: Earnings been rising during the last 3 years and look to rise this year and next year
Green Flag: The latest quarterly earnings has surprised to the upside.
Green Flag: This years earnings has been revised upwards.
Green Flag: Next years earnings has been revised upwards.
Golden Flag: All three lines above show upwards revisions.
Red Flag: All three lines above show downwards revisions.
Green Flag: P/E <12
Red Flag: P/E > 30
Green Flag: Present P/E is lower than the average P/E over the last 5 years
Red Flag: Present P/E is higher than the average P/E over the last 5 years (unless earnings are rising)
Step 6: Last Year's Total Return - This Year's Momentum
We are dealing with stable stocks which are nevertheless susceptible to unknown events and managerial miscues. Those with strong leadership, entrepreneurial character and competitiveness almost always return to an upwards trajectory. Warren Buffett famously notes "In the short run, the market is a voting machine, but in the long run, it is a weighing machine." - we want to profit from this phenomenon.
Green Flag: If the stock lost more than 20% of its share price and shows upgraded earnings for this year
Red Flag: If the stock gained more than 20% last year and shows downgraded earnings for this year.
Green Flag: If the stock lost more than 20% of its share price and shows upgraded earnings for this year
Red Flag: If the stock gained more than 20% last year and shows downgraded earnings for this year.
Step 7: Annual Revenue
Green Flag: This years annual revenue has been revised upwards.
Red Flag: This years annual revenue has been revised downwards.
Green Flag: Annual revenue > $100B
Red Flag: This years annual revenue has been revised downwards.
Green Flag: Annual revenue > $100B
Step 8: Miscellaneous
Green Flag: The company sells globally
Green Flag: The company has a great team leader (possibly a "Mandarin" with ties to upper government)
Green Flag: The directors own >10% of the company
Green Flag: The directors/officers are buying personal shares of the company.
Red Flag: The directors/officers are selling personal shares of the company.
Green Flag: The company has a great team leader (possibly a "Mandarin" with ties to upper government)
Green Flag: The directors own >10% of the company
Green Flag: The directors/officers are buying personal shares of the company.
Red Flag: The directors/officers are selling personal shares of the company.
Step 9: Discounted Cashflow Model
Green Flag: Todays stock price based on future cashflow is discounted 15% over the next 5 years
Golden Flag: Todays stock price based on future cashflow is discounted 20% over the next 5 years
Model Rule 1: If EPS growth is > 15%, use 15%/annum for EPS growth projection over next 5 years
Model Rule 2: If P/E is > 20, multiply 5 yr share price by 15%
Model Rule 3: The 5th yr share price + the 5 years of future dividend = projected stock price in 5 years
Golden Flag: Projected stock price in 5 years > double the present share price
Golden Flag: Todays stock price based on future cashflow is discounted 20% over the next 5 years
Model Rule 1: If EPS growth is > 15%, use 15%/annum for EPS growth projection over next 5 years
Model Rule 2: If P/E is > 20, multiply 5 yr share price by 15%
Model Rule 3: The 5th yr share price + the 5 years of future dividend = projected stock price in 5 years
Golden Flag: Projected stock price in 5 years > double the present share price
Step 10: Use AI as a tool to confirm a stock information
Once your main analysis is completed, use AI as a tool to double check if you are missing any additional information that the stock analyst community may have. A simple prompt into one of the AI Agents asking " why is this stock going up", or "why is this stock going down" will elicit up to date information that you may not know about.
Addendum: Portfolio Balancing Between 6 Economic Sectors
Balancing an investment stock portfolio among the 7 economic sectors noted below can increase the margin of safety. A sample of stocks have been provided which score well in our algorithm for each sector as of 19 January 2026. These selections are designed to be held for the long run, however, they will change on this page from time to time. Always ensure that you do the appropriate research before investing.
Software Consumer Products |
Utility |
Manufacturing |
Consumer Products |
Resources |
Financial |
Multi-Sector
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