Methodology — Graham-Buffett Value Investing Framework
Overview
STOKS implements a systematic stock screening pipeline inspired by the investment philosophies of Benjamin Graham (father of value investing) and Warren Buffett (quality + moat emphasis). The pipeline runs six sequential stages to identify stocks that offer both quality and value.
Stage A — Hard Filters
Eliminates stocks that fail fundamental Graham-style safety criteria:
- P/E Ratio ≤ 10 — strict Graham value threshold
- Consistent Positive EPS — minimum years of positive earnings
- Consistent Positive FCF — free cash flow track record
- Debt/Equity ≤ 1.0 — conservative leverage
- Current Ratio ≥ 1.5 — adequate liquidity
- Share Dilution < 3% CAGR — shareholder-friendly capital allocation
Stage B — Quality Score
Evaluates the business quality through a weighted composite score (0-100):
- ROIC (25%) — Return on invested capital, the key Buffett metric
- ROE (20%) — Return on equity
- Margin Stability (20%) — Consistency of gross margins over time
- Operating Margin Trend (15%) — Improving or stable margins
- Revenue Trend (10%) — Organic growth trajectory
- FCF Margin (10%) — Cash conversion efficiency
Stage C — Cyclicality Detection
Identifies cyclical businesses and normalizes their earnings to avoid buying at peak cycle. Uses operating margin deviation analysis and sector-based heuristics. Cyclical companies get their EPS normalized to mid-cycle levels for fairer valuation.
Stage D — Intrinsic Value & Margin of Safety
Estimates intrinsic value using two complementary methods:
- Earnings Power Value (EPV) — What the company is worth based on current normalized earnings, assuming no growth (Graham approach)
- Conservative DCF — Discounted cash flow model with conservative growth assumptions (Buffett approach)
Margin of Safety thresholds: Strong Buy ≥ 45%, Buy ≥ 30%. Discount rate: 11% (approximating long-term equity returns).
Stage E — Value Trap Detection
Checks for red flags that often indicate a stock is cheap for good reason:
- Revenue and margin declining simultaneously
- FCF diverging negatively from reported EPS
- Accelerating debt growth
- Deteriorating interest coverage
Stage F — Final Scoring & Signal
Produces a weighted composite score and assigns a signal:
- STRONG BUY — High quality + large margin of safety + no traps
- BUY — Good quality + adequate margin of safety
- WATCH — Interesting but needs monitoring
- REJECT — Fails one or more critical criteria
Data Sources & Limitations
Currently using Yahoo Finance (via yfinance library) for financial data. The free API provides ~4 years of annual statement data, which limits lookback periods. All calculations adapt automatically to available data depth.
Important: This tool is a screening aid, not a recommendation engine. Always verify data independently and conduct thorough qualitative analysis before making any investment decision.