“The bitterness of poor quality remains long after the sweetness of low price is forgotten.”
Benjamin Franklin
As investors, we want to buy when a stock is cheap and sell when it’s expensive. But how cheap is cheap enough depends a lot on the quality of the business underneath. It’s the old line about it being better to buy a wonderful business at a fair price than a fair business at a wonderful price.
You could see that play out in our recent Michael Hill Spotlight. By most measures the shares looked cheap, yet members weren’t especially keen. The business just isn’t seen as high quality, or more fairly, it operates in an industry where any lasting edge is hard to hold on to.
Price alone doesn’t capture that. So we’ve added two new features to Strawman: a Quality rating on every valuation, and a Radar chart that plots quality against value.
Rating quality
Every valuation on Strawman now asks for a quality score. This is your view of how good the business is, setting price aside. There’s no avoiding some subjectivity. Generally, though, a high-quality business has a lasting competitive advantage and pricing power, earns high returns on the capital it reinvests, needs little maintenance capital, and produces steady earnings and plenty of free cash flow. In the end, it’s whatever “good” means to you.
In the valuation editor you pick from a five-step scale: Low, Low–Medium, Medium, Medium–High or High.
Your score sits alongside your valuation. As with valuations, scores are averaged on the Community tab of each company page, so you can see how members rate a business overall. Scores older than a year drop out, which keeps the average current.
The Radar
With both numbers recorded, we can plot them on one chart. We’re calling it the Radar.
Quality runs left to right, from Low to High. Value runs up and down, with fair value across the middle. The higher a company sits, the cheaper its last price is against intrinsic value. The most attractive names land up and to the right: high quality and cheap.
A company only appears if it has both a current valuation and a current quality score. Once either is more than a year old, it drops off. (The charts will look fairly bare at first, but they’ll fill out as members add scores.)
There are two versions.
Your Radar lives on your profile and plots every company where you’ve recorded both numbers. Private valuations only ever appear on your own chart. At a glance you can see which of the stocks you’ve journaled look most attractive, and which look least so. There’s also a suggested weighting. It’s far from an exact science, but it should nudge you to lighten up on expensive, low-quality names and lean into the high-quality, cheap ones.
The Community Radar sits on the Companies page. It works the same way, but uses the published numbers from all Premium members, showing average quality, average valuation and how many people contributed. In other words, it shows where the Strawman community thinks companies sit on quality and value.
A simpler way to value a stock
I know valuations scare a lot of investors (understandably). To make them less daunting, we’ve added a basic valuation tool to the valuation editor, based on the simple model I shared on the blog last year.
For each of three scenarios, you enter a forecast earnings per share, the price-to-earnings multiple you expect at the end, how many years away that is, and a discount rate. The tool turns earnings and the multiple into a future share price, discounts it back to today, then blends the three scenarios using the weights you give them.
For now, the tool doesn’t save your inputs. It’s there to help you get to a number. If enough members find it worthwhile, I’ll look at adding that.
Get amongst it
It’ll make more sense once you’ve played with it, and I hope it gives you a more methodical way to think about how much of each stock you hold. So start rating the quality of the companies you follow. Adding a quality score also means posting a valuation, which builds a richer and more useful dataset for everyone.
I’m pretty chuffed with this one. Hopefully it proves genuinely practical rather than a gimmick, and as always, let us know what you think (particularly the negative feedback, as is the Strawman way).
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