US Stock Evaluation

US Stock Evaluation

Perform comprehensive stock evaluation combining fundamental analysis, valuation modeling, quality scoring, and risk assessment to produce investment-grade conclusions.

Analysis Components

1. Company Overview

• Business model and competitive advantages (moat assessment)
• Market position, addressable market size, and industry trends
• Revenue mix by segment and geographic exposure
• Key products, services, and customer concentration
• Competitive dynamics and threat of disruption

2. Financial Health

• Revenue and earnings growth trends (3-year and 5-year CAGR)
• Profit margins: gross margin, operating margin, net margin
• Margin trends: expanding, stable, or compressing
• Balance sheet strength: cash, total debt, net debt, book value
• Liquidity: current ratio, quick ratio, cash conversion cycle
• Cash flow analysis: operating cash flow, free cash flow, FCF yield
• Capital expenditure requirements (maintenance vs. growth capex)
• Working capital management efficiency

3. Valuation Metrics

Metric	Current	1-Year Ago	5-Year Avg	Sector Avg
P/E (TTM)
P/E (Forward)
PEG Ratio
Price/Book
Price/Sales
EV/EBITDA
EV/FCF
Dividend Yield
Payout Ratio

4. Key Ratios

Ratio	Current	Industry Avg	Assessment
Return on Equity (ROE)
Return on Assets (ROA)
Return on Inv. Capital
Gross Margin
Operating Margin
Net Margin
Current Ratio
Quick Ratio
Debt-to-Equity
Interest Coverage
Asset Turnover

5. Peer Comparison

• Direct peer comparison within industry on key valuation multiples
• Historical valuation trends vs. own 5-year history
• Sector performance context and relative positioning
• Market share trends vs. competitors

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Quality Scoring Framework

Piotroski F-Score (0–9)

The Piotroski F-Score measures financial strength and operating improvement across 9 binary criteria. Each criterion scores 1 (pass) or 0 (fail). Score of 8–9 is strong; 0–2 is weak.

Profitability Signals (4 criteria):

#	Criterion	Formula	Pass Condition	Score
1	ROA > 0	Net Income / Total Assets	Positive ROA in current year	0 or 1
2	Operating Cash Flow > 0	CFO from cash flow statement	Positive CFO	0 or 1
3	Change in ROA	ROA(t) − ROA(t-1)	ROA improved year-over-year	0 or 1
4	Accruals (quality)	CFO / Total Assets > ROA	Cash earnings exceed reported earnings	0 or 1

Leverage, Liquidity & Source of Funds (3 criteria):

#	Criterion	Formula	Pass Condition	Score
5	Change in Leverage	Long-term Debt / Avg Assets	Leverage decreased YoY	0 or 1
6	Change in Liquidity	Current Ratio(t) vs (t-1)	Current ratio improved YoY	0 or 1
7	No New Shares Issued	Diluted shares outstanding	No new equity issuance in past year	0 or 1

Operating Efficiency (2 criteria):

#	Criterion	Formula	Pass Condition	Score
8	Change in Gross Margin	Gross Margin(t) vs (t-1)	Gross margin expanded YoY	0 or 1
9	Change in Asset Turnover	Revenue / Total Assets	Asset turnover improved YoY	0 or 1

F-Score Interpretation:

• 8–9: Strong financial position — high-quality candidate
• 5–7: Average quality — neutral
• 0–2: Weak financial position — high risk of deterioration

Earnings Quality Score

• Accruals Ratio: (Net Income − CFO) / Average Total Assets. Low or negative accruals indicate high earnings quality (cash-backed profits).
• Cash Conversion Rate: CFO / Net Income. Ratio consistently above 1.0x is positive. Below 0.7x signals potential earnings inflation.
• Non-Recurring Items: Identify and strip out restructuring charges, asset write-downs, gains on asset sales, and one-time tax benefits from normalized earnings.
• Revenue Recognition Risk: Assess channel stuffing, bill-and-hold arrangements, and aggressive deferred revenue recognition.

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ROIC / WACC Analysis

ROIC Calculation

ROIC = NOPAT / Invested Capital

• NOPAT (Net Operating Profit After Tax) = EBIT × (1 − effective tax rate)
• Invested Capital = Total Equity + Total Debt − Cash and Cash Equivalents
• Alternatively: Invested Capital = Net PP&E + Net Working Capital + Goodwill + Other Long-term Operating Assets

Component	Value
EBIT
Effective Tax Rate
NOPAT
Total Equity
Total Debt
Less: Cash
Invested Capital
ROIC

WACC Calculation

WACC = (E/V) × Re + (D/V) × Rd × (1 − T)

• Cost of Equity (Re) via CAPM: Re = Rf + β × (Rm − Rf)
  • Rf: Risk-free rate (current 10-year Treasury yield)
  • β: Stock beta (5-year monthly vs. S&P 500)
  • (Rm − Rf): Equity risk premium (historical ~5–6%)
• Cost of Debt (Rd): Weighted average interest rate on outstanding debt
• Capital Structure Weights: E/V = market cap / (market cap + total debt), D/V = total debt / (market cap + total debt)
• Tax Shield: Multiply Rd by (1 − marginal tax rate) to reflect interest deductibility

Component	Value
Risk-Free Rate (Rf)
Beta (β)
Equity Risk Premium
Cost of Equity (Re)
Pre-Tax Cost of Debt
Tax Rate
After-Tax Cost of Debt
Equity Weight (E/V)
Debt Weight (D/V)
WACC

Economic Value Added (EVA)

EVA = (ROIC − WACC) × Invested Capital

• ROIC > WACC: Company is creating economic value — every dollar invested earns more than its cost. Strong positive signal.
• ROIC = WACC: Company is breaking even economically — no value creation or destruction.
• ROIC < WACC: Company is destroying shareholder value — capital is deployed below its opportunity cost. Significant warning sign.

ROIC vs. WACC spread trend (expanding = improving value creation, compressing = deteriorating):

Year	ROIC	WACC	Spread	EVA
Current
-1 Year
-2 Year
-3 Year

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DCF Framework

Step-by-Step DCF Methodology

Step 1 — Project Free Cash Flow (Years 1–10)

• Start with current year base FCF = Operating Cash Flow − Maintenance Capex
• Apply revenue growth rate assumptions (differentiate Phase 1: high growth, Phase 2: fade to stable)
• Apply operating margin assumptions (expanding/stable/compressing)
• Deduct taxes and changes in net working capital
• FCF = NOPAT + D&A − Change in Working Capital − Capex

Step 2 — Terminal Value Calculation

• Gordon Growth Model: TV = FCF(Year 10) × (1 + g) / (WACC − g)
• Exit Multiple Method: TV = EBITDA(Year 10) × Terminal EV/EBITDA multiple
• Terminal growth rate (g): typically 2–3% (in line with long-run nominal GDP growth)
• Cross-check both methods for reasonableness

Step 3 — Discount to Present Value

• Discount each year's FCF: PV(FCFt) = FCFt / (1 + WACC)^t
• Discount terminal value: PV(TV) = TV / (1 + WACC)^10
• Enterprise Value = Sum of all discounted FCFs + PV(Terminal Value)
• Equity Value = Enterprise Value − Net Debt
• Intrinsic Value Per Share = Equity Value / Diluted Shares Outstanding

Key Assumptions

Assumption	Base Case	Bull Case	Bear Case
Revenue Growth Yr 1–5
Revenue Growth Yr 6–10
Operating Margin
Tax Rate
Capex (% Revenue)
WACC
Terminal Growth Rate
Terminal EV/EBITDA

Sensitivity Table

Intrinsic value per share at various WACC and terminal growth rate combinations:

WACC \ Terminal Growth	1.5%	2.0%	2.5%	3.0%	3.5%
7%
8%
9%
10%
11%

Margin of Safety Assessment

• Intrinsic Value (Base Case):
• Current Market Price:
• Premium / (Discount) to Intrinsic Value:
• Margin of Safety: (Intrinsic Value − Market Price) / Intrinsic Value × 100%

  • 30% discount: Significant margin of safety — compelling value

  • 10–30% discount: Moderate margin of safety — attractive
  • 0–10% discount: Limited margin of safety — fairly valued
  • Trading at premium: No margin of safety — risk of capital loss if assumptions miss

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Management Quality Assessment

Capital Allocation Track Record

• ROIC Trend: Is management generating returns above cost of capital consistently? Review 5-year ROIC history.
• Acquisition History: Evaluate past M&A for value creation. Did acquired assets earn above WACC? Were goodwill impairments taken post-acquisition?
• Buyback Timing: Did management repurchase shares below intrinsic value? Assess buyback price vs. subsequent performance.
• Dividend Policy: Sustainable payout ratio? Dividend growth track record. Balance between dividends, buybacks, and reinvestment.
• Capex Discipline: Differentiate growth capex vs. maintenance capex. Asset-light vs. capital-intensive business assessment.

Guidance Accuracy History (Last 8 Quarters)

Quarter	EPS Guidance	EPS Actual	Beat/Miss	Revenue Guidance	Revenue Actual	Beat/Miss
Q1
Q2
Q3
Q4
Q5
Q6
Q7
Q8
Rate			X/8			X/8

• Beat rate above 75% (6+/8) is strong. Below 50% suggests overpromising or deteriorating visibility.
• Assess guidance conservatism (sandbagging tendency) vs. optimism bias.

Insider Ownership Alignment

• CEO ownership (% of shares outstanding): > 3% meaningful, > 10% highly aligned
• Board ownership: Independent directors with meaningful personal stakes indicate alignment
• Recent insider transactions: Open-market buys are strongly positive; sells can be routine diversification
• Insider buy/sell ratio over past 12 months
• 10b5-1 plan activity: Scheduled plan sales are less informative than discretionary transactions

Compensation Structure

• Pay-for-performance alignment: Are bonuses and equity vesting tied to ROIC, FCF, and total shareholder return (TSR)?
• Long-term equity grants: Stock option or RSU vesting periods (3+ years preferred)
• CEO pay ratio: Context for compensation relative to company size and peers
• Say-on-pay vote: Shareholder approval percentage in most recent proxy vote
• Excessive compensation red flags: Guaranteed bonuses, repriced options, change-of-control severance packages

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Analyst Consensus Tracking

Current Consensus Summary

Metric	Value
Buy Ratings	X (X%)
Hold Ratings	X (X%)
Sell Ratings	X (X%)
Mean Price Target
High Price Target
Low Price Target
Current Price
Upside to Mean Target
# of Analysts

Consensus interpretation:

• 70% Buy with >20% upside to mean target: Strong consensus support

• Mixed ratings with tight price target range: Consensus uncertainty

• 30% Sell ratings or mean target below current price: Consensus cautious

Estimate Revision Trend

Track the direction of earnings estimate changes over time:

Period	EPS Estimate (Current FY)	Change vs. 30 Days Ago	Change vs. 90 Days Ago
Current FY
Next FY
Revenue (FY)

• Estimates rising: Positive revision momentum — analysts upgrading expectations
• Estimates falling: Negative revision momentum — earnings risk, watch for guidance cuts
• Stable estimates: Predictable business with low estimate volatility

Earnings Estimate Revision Momentum (ERM Signal)

• ERM = (Number of upward revisions − Number of downward revisions) / Total revisions over 30 days
• ERM > +0.3: Strong positive momentum — bullish signal
• ERM −0.3 to +0.3: Neutral
• ERM < −0.3: Negative momentum — bearish signal
• Most reliable when combined with price momentum confirmation

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Risk Assessment Matrix

Business Risk

Risk Factor	Level (L/M/H)	Notes
Industry cyclicality
Competitive intensity
Disruption threat
Customer concentration
Supplier concentration
Regulatory exposure
ESG / litigation

Financial Risk

Risk Factor	Level (L/M/H)	Notes
Leverage (Net Debt/EBITDA)
Liquidity (Current Ratio)
Refinancing risk (near-term maturities)
Covenant compliance
Pension obligations
Off-balance-sheet items

Leverage thresholds (Net Debt/EBITDA):

• < 1.0x: Conservative, strong balance sheet
• 1.0–2.5x: Moderate, manageable
• 2.5–4.0x: Elevated, monitor closely

• 4.0x: High financial risk, limited flexibility

Valuation Risk

Scenario	Implied Multiple	Notes
Bull case intrinsic value
Base case intrinsic value
Bear case intrinsic value
Current market price
Premium to bear case

• Multiple compression scenario: If sector re-rates to lower multiples (e.g., in rising rate environment), what is the downside?
• Earnings miss scenario: What happens to price if EPS misses by 10%? By 20%?
• Sentiment shift risk: High-multiple, high-expectation stocks carry disproportionate downside on minor guidance cuts.

Macro Risk

Factor	Impact Level	Current Exposure
Interest rate sensitivity
USD/FX exposure
Commodity cost exposure
Tariff / trade risk
Geopolitical exposure
Regulatory / antitrust

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Output Format

Provide clear, actionable insights structured as follows:

1. Investment Thesis Summary (2–3 sentences capturing the core bull or bear case)
2. Valuation Assessment: Undervalued / Fairly Valued / Overvalued, with DCF and multiple-based support
3. Quality Score: Piotroski F-Score, Earnings Quality, ROIC vs. WACC verdict
4. Management Assessment: Capital allocator quality, guidance credibility, ownership alignment
5. Analyst Consensus: Current ratings, price target vs. market, estimate revision direction
6. Key Risks: Top 3 risks that could invalidate the thesis
7. Price Targets: Bull / Base / Bear case with probability weighting
8. Recommended Entry Zone: Based on margin of safety and technical support levels

Standard Signal Output

All analysis concludes with this standardized block:

╔══════════════════════════════════════════════╗
║              INVESTMENT SIGNAL               ║
╠══════════════════════════════════════════════╣
║ Signal:      BULLISH / NEUTRAL / BEARISH     ║
║ Confidence:  HIGH / MEDIUM / LOW             ║
║ Horizon:     SHORT / MEDIUM / LONG-TERM      ║
║ Score:       X.X / 10                        ║
╠══════════════════════════════════════════════╣
║ Action:      BUY / HOLD / SELL               ║
║ Conviction:  STRONG / MODERATE / WEAK        ║
╚══════════════════════════════════════════════╝

Score Guide: 8.0–10.0 Strongly Bullish | 6.0–7.9 Moderately Bullish | 4.0–5.9 Neutral | 2.0–3.9 Moderately Bearish | 0.0–1.9 Strongly Bearish Confidence: HIGH (strong data, clear signals) | MEDIUM (mixed signals) | LOW (limited data, conflicting signals) Horizon: SHORT-TERM (1 week–3 months) | MEDIUM-TERM (3 months–1 year) | LONG-TERM (1+ years)