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Our Scorecards Explained

April 17, 2024
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Wiko Steyn
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Wiko Steyn

A look into our stock scoring methods

 

We believe that using a scorecard helps investors to make better decisions when researching companies. We encourage investors to create their own scorecards and choose criteria based on their financial goals - this will vary depending on age, risk, investment style and time horizon. This process forces investors to do their due diligence and to not blindly invest in someone else's conviction. The purpose is to keep yourself accountable and not make rash or emotional decisions regarding your investments. In the end, you will have a much deeper understanding of the companies you own and this will benefit you greatly, especially in times of volatility. 


Core Fund (Risk 6/10)

First, we have to review the prospectus of the portfolio. This fund focuses on established leaders and consists mostly of growth stocks. The Core Fund should generally trade in parallel with the broader US growth market. Our goal is to outperform the Nasdaq 100 by identifying the best companies in their respective industries. Here we put little emphasis on the valuations of companies, we rather use our dollar-cost averaging (DCA) method and long time horizon to lower risk. We only focus on quality, growing companies. These companies must exhibit a combination of all six qualifying metrics. Each metric is scored out of 20 and they all carry the same weight. 

Core Score = Moat + Management + Financials + Business Model + Future Growth - Risk

 

Moat

An economic moat is a term conceptualised by legendary investor Warren Buffet. It is most easily described as a distinct advantage that the company has over its rivals. This advantage can come in many forms, but it should be able to protect the company's market share, future growth and profit. This is usually the most difficult to score, as it requires a thorough understanding of the company and the industry it operates in.

Management 

Management's role in a company must never be underestimated. They will essentially make or break the company, especially over a longer time period. We love founder-led companies, where management still has enough skin in the game to stay motivated. Diving into the directors' and top management's history can give you valuable insight. We also use Glassdoor to peek into the company's culture and see how the employees rate the CEO. 

Financials

The most important metrics we look at are Gross Margins, Balance Sheet, Free Cash Flow, Net Income and Return on Capital. We also compare the companies to their industry peers.

Business model

We ask the following questions to score a company's business model. How does the company make money? What is the company's mission statement? Does the company have recurring revenue? Is the business recession-proof? For software companies, we typically also look at metrics like Net-Dollar Retention Rate and Customer Acquisition Cost.

Future growth

How long is the company's growth runway? How big is the TAM? Does the company have optionality to expand their business? What does the future of the industry look like?

Risk

Competition, share dilution, valuation, customer concentration, geo-political and any company-specific risks.

 

The scorecard is divided into 3 categories:

  • >75 Core Fund Approved 
  • 60-74 Investable
  • <60 Untouchable

 

Unicorn Portfolio (Risk 8/10)

The primary objective of this portfolio is to identify asymmetrical risk/reward opportunities. We are looking for great companies with massive future potential, hoping to find a unicorn along the way. Most of the investments will be in small to mid-cap companies. Speculative stocks may be included in this portfolio.  

All 6 metrics are scored out of 10. The total score is calculated as follows:

Unicorn Score = (Conviction X Upside Potential) + Moat + Management + Financials - (3 X Risk)

The scorecard is divided into 5 categories:

  • >80  Unicorn 
  • 70-79 Great Business
  • 50-69 Investable
  • 40-49 Think Again
  • <40 Untouchable

Why is it so difficult to find a Unicorn stock? If you look at the weight each metric carries, it is clear that we emphasise conviction, upside potential and risk. For a company to score above 80, it will need a very rare combination where we have a high conviction, and see massive upside potential but the risk levels are acceptable. Thus far we have only identified one unicorn, and this stock is already up 40% since we have added it. In this scorecard, valuation does play a role because it influences the upside potential. The Unicorn Scorecard was designed to level the playing field so that a preclinical biotech company with no revenue can be compared with a mid-cap value stock. 


An example of a scorecard of each portfolio is attached as an image. We also recently introduced two more portfolios, Safe Haven (Risk 4/10) and Biotech Longshots (Risk 10/10) but here we do not use our scorecards to make our stock picks since these stocks serve a different purpose in our overall portfolio.  You can read all about these portfolios in their Launch articles.


 


 


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