How a verdict is built
Five steps, 29 checks, one rule: cheap only counts if the business is not falling apart.
Is it cheap against itself and its peers?
Price-to-earnings, price-to-book, free cash flow yield, PEG, EV/EBITDA, stock-based compensation as a share of revenue, and price against the average analyst target. Each is compared with a benchmark such as the five-year average or the sector median.
7 checksIs the business getting better or worse?
Revenue, margins, free cash flow, debt, return on invested capital against cost of capital, moat, customer concentration and the management's record against its own guidance, judged over three to five years.
8 checksWhat are informed people doing?
Insider buying or selling, institutional ownership trend, short interest, estimate revisions, the position against its 70-day moving average, and the 14-day relative strength index.
6 checksAre the big holders staying or leaving?
The share of asset managers still holding versus those that sold out last quarter, the same for hedge funds, and the analyst split between buy, hold and sell with the average price target.
3 checksCan it survive long enough to be right?
Current ratio, interest cover, near-term debt maturities, Altman Z-score and dividend safety. Companies that pay no dividend drop that check rather than being penalised for it.
5 checks
How the score is calculated
Each check scores 1 (healthy), 0.5 (mixed) or 0 (weak). The score is points earned divided by checks answered. A verdict appears only once at least 70% of checks have an answer, so thin data cannot produce a confident-looking result.
| Score | Verdict |
|---|---|
| 80% and above | Likely undervalued |
| 60 to 79% | Mixed — dig deeper |
| 40 to 59% | Caution |
| Below 40% | Likely declining |
The catalyst override
You also record why the stock is cheap. If the reason is a structural decline or a disruption threat to the moat, the verdict is capped at Caution however good the other numbers look. A market overreaction or an industry-wide cyclical trough does not cap it.
This is the rule that separates a bargain from a trap: a low price on a permanently shrinking business is not a discount.
What it is not
It is not a prediction of price, a trading signal, or personal advice. It is a structured way to ask the right questions quickly. Read the risk disclosure.