Actionable insights — Our Shopping List (Part I)

1. End every research note with a target multiple and the price it implies

1. Do the quality work first and reach a verdict on the business independent of price.
2. Then choose one multiple you would pay — and say why that one (a historical average, a peer, a required return).
3. Convert it to a share price, and print it next to the current price. The gap is the output.
4. Keep the list; when a name is later bought, check the price paid against the number you published.

• Targets quietly revised upward when a name runs. The value of publishing is entirely in the later comparison.
• A list where none of the entries is reachable. That is a wish list, and it should be labelled as one.

2. Restate the multiple after stock-based compensation before you call anything cheap

1. Take stock-based compensation from the cash flow statement and express it as a percentage of net income.
2. If it is material — anything above roughly 10% deserves the work — deduct it and recompute earnings.
3. Recompute the forward multiple on the adjusted number, and treat that as the real one.
4. Set the entry target on the adjusted basis too, so the two numbers are comparable.
5. Check whether the "cheapest in a decade" claim survives the adjustment. Often it does not.

• Companies whose SBC ratio is rising — the adjustment gets worse each year and the reported multiple gets progressively less informative.
• Buyback programmes that merely offset dilution being counted as shareholder returns.

3. Value a cash-rich company both ways, then set the target on the stricter one

1. Measure net cash as a percentage of market capitalisation.
2. Compute the forward multiple twice: on the market cap as quoted, and on enterprise value with the cash stripped out.
3. Publish both, so the reader knows how much of the apparent cheapness is just idle cash.
4. Set your entry target on the including-cash basis unless you have a reason to believe the cash will be deployed well.

• Net cash that never gets used. A permanent hoard is not worth face value to a minority holder.
• The temptation to switch bases mid-argument — cheap on EV, expensive on P/E, quote whichever suits.

4. Price a holding company against NAV, not against earnings

1. For a holding or investment company, find the published net asset value per share and its date.
2. Compare it to the share price to get the discount or premium.
3. Check how stale the NAV is and how much of it is unlisted (marked by the manager) rather than quoted.
4. Look through to the dominant underlying asset and underwrite that — the wrapper only decides the price you pay for it.
5. Set the entry as a discount level, and be explicit about what discount is normal for this vehicle.

• The NAV date. A year-end figure quoted in April is four months old, and unlisted marks move on a lag.
• Concentration masquerading as diversification: a "private equity portfolio" that is 90% one asset is a single-stock position.

5. Use unit payback period to decide whether growth needs outside money

1. Find the all-in cost of one new unit — a store, a site, a route, a machine.
2. Find the annual cash it generates once open.
3. Divide: that is the payback period, and it determines whether expansion is self-funding.
4. Multiply the free cash flow by the payback to get the number of units the business can open per year without borrowing or issuing shares.
5. Sanity-check it against the actual opening rate.

• Payback figures quoted on mature stores rather than new ones — the newest cohort is the one that matters.
• Saturation showing up first as a lengthening payback, before it shows up in the opening rate.

6. Look for one number that isolates pricing power from volume

1. Find a revenue line where the unit volume is separately observable.
2. Compare revenue growth with unit growth. The difference is price.
3. If revenue grew sharply while units were flat or falling, you have measured pricing power directly rather than inferred it from margins.
4. Then ask what enforces it — regulation, embedded workflow, a certification, or just habit.

• The regulatory foundation being the thing that breaks — two weeks later the FHFA approved VantageScore 4.0 for mortgage underwriting and the stock fell more than 55% from its peak.
• Pricing power measured over one year. Repeated increases without volume loss are the test, not a single hike.

7. Frame every candidate as a switch, with a required improvement in expected return

1. Estimate an expected annual return for each position you already hold.
2. Estimate the same for each candidate, on the same method.
3. Only consider a switch when the difference is large enough to survive tax, spread and the risk of being wrong about both.
4. Run the sell review before the buy list, so the comparison has a specific loser rather than a vague one.

• Expected returns computed on different methods for the incumbent and the challenger — the comparison is only valid on a single model.
• The switch never happening. Nine days later the money went to three existing holdings instead, which is a legitimate answer but a different one.