My Investable Universe #4

How to find stocks inside your investable universe?

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Types of Investors

Here is a nice table for the different types of investors.

• I am in the Quality Investor camp

• I choose the best companies in the world

• I do not put a lot of emphasis on dividend yield, p/e ratio, and other traditional metrics

• I find for example: ROIC and capex/revenue metrics more useful for analyzing a company’s competitive advantage

What is an investable universe?

• It is a group of stocks you find attractive based on some criteria.

• You make a list, and only companies on the list can be added to your portfolio

• The purpose of this technique is to filter out the noise

• It narrows down your focus to just less than 1% of companies

• Here is a visual example:

  

How do you find them?

• Look for companies with these qualities and compare them to the index average

• healthier balance sheet

• better capital allocation

• higher cash conversion

• higher growth rates

• wider moat

After screening, it is important to examine each company manually and look for these:

• Understand the business model

• Get to know the management of the company

• Value them with a DCF model to see their intrinsic value

• But don’t spend too much time with valuation; just see if valuation makes sense or not

My investable universe

• I am constantly trying to find the best quality stocks.

• I use screening tools to find new companies that can be added to my investable universe list

• You can read my #2 article for more about screeners

• Here is a screener you can use, for example:

  • Revenue growth >7%

  • Cash conversion >90%

  • ROIC >15%

  • FCF/share growth >10%

  • Net Debt / Free Cash Flow <3

My Philosophy in Investing #2

A disclaimer on my Investable universe

You may come across other stocks that exhibit monopolistic traits and possess exceptionally high quality. I am consistently engaged in research. If a company isn't included on the list, it doesn't necessarily imply that it shouldn't be there. I have limited time and resources at my disposal, so I employ screening methods to discover new stocks. Nevertheless, it's quite challenging to stay updated across all sectors, industries, and countries. I prefer to focus on my area of expertise and geographical comfort zone. I concentrate on companies I can comprehend to a certain extent. Consumer-oriented businesses are easier to fathom than B2B enterprises due to their inherent complexity. Some companies on my list are less familiar to me than others, but I'm actively working on in-depth research for them.

Here is the list of my Investable Universe (43 stocks)👇

I have divided them into 3 tiers based on their quality

(Bold is part of my portfolio and there is no particular order inside the tiers!)

Tier 3