📊 Valuation Methodology
Our intrinsic value model uses only publicly available SEC EDGAR data—no market prices, no external data sources. This ensures our valuations are independent and can identify market mispricing.
🔬 Core DCF Framework:
- Risk-Free Rate: 10-year U.S. Treasury rate (~4.2%, updated daily via FRED API). This represents the "time value of money" baseline.
- Equity Risk Premium (ERP): 4.21% base (Damodaran 2025). This is the extra return investors demand for taking stock market risk vs. risk-free bonds.
- Projection Period: 5 years of detailed cash flow projections, then a terminal value for all future years.
- Terminal Growth Rate: Determined by historical fundamentals, competitive advantages, and financial health—no artificial caps. Typically 2-3% for mature companies, higher for companies with strong moats.
📈 Growth Rate Prediction (15-Year Historical Analysis):
We analyze 15 years of SEC filings to dilute the impact of short-term anomalies like COVID recovery:
- Model Selection: Automatically chooses the best-fitting model (linear, quadratic, or exponential) using statistical criteria (AIC, BIC, R², RMSE).
- Time-Weighting: Recent years weighted more heavily (exponential decay), but long history prevents overfitting to recent trends.
- Outlier Detection: Identifies and handles unusual periods (e.g., COVID disruptions) to avoid distorting growth projections.
- Revenue vs. Earnings Consistency: If earnings grow much faster than revenue, we blend the rates to avoid unrealistic projections.
🎯 Company-Specific Risk Premium (Earnings-Based):
Instead of using stock price volatility (beta), we calculate risk from actual business fundamentals in SEC filings:
- Earnings Volatility (40% weight): How consistent are earnings? More volatile = higher risk premium.
- Earnings Persistence (15% weight): Do good/bad earnings years predict future performance? Higher persistence = lower risk.
- Earnings Quality (10% weight): Ratio of cash flow to net income. Higher cash component = more reliable earnings = lower risk.
- Financial Distress Risk (15% weight): Altman Z-score (except for banks). Lower Z-score = higher bankruptcy risk = higher premium.
- Base Market Risk Premium (20% weight): 4.21% (Damodaran's 2025 estimate for mature markets).
Why earnings-based? Stock prices can be irrational; earnings reflect actual business performance. Academic research (Ball & Brown 1968, Beaver et al. 1970) shows earnings volatility better predicts business risk than price volatility.
🏰 Competitive Advantage (Moat) Analysis:
We analyze 15-20 years of SEC data to identify sustainable competitive advantages:
- Scalability: Can the company grow without proportional increases in assets or working capital? (Asset turnover, working capital efficiency)
- Margin Persistence: How stable are profit margins over 15+ years? Consistent high margins suggest pricing power.
- Market Saturation Signals: Declining revenue growth trends may indicate market maturity.
- Asset-Light Model: Companies that generate high revenue with low asset requirements (e.g., software, services).
Strong moats (≥80/100): +0.5% terminal growth, -0.5% risk premium. Moderate moats (60-79): +0.2% terminal growth, -0.2% risk premium.
🔧 Special Adjustments:
- CapEx Normalization: If a company has unusually high capital expenditures (>30% of revenue) but strong operating cash flow (>20% margin), we normalize CapEx for projections. This handles temporary strategic investments (e.g., Oracle's cloud infrastructure buildout) without penalizing long-term value.
- Bank Exclusion: Banks are excluded from Altman Z-score (not applicable). They use the base risk premium with earnings-based adjustments only.
- Stock Split Detection: Automatically detects and applies stock splits from 8-K filings to ensure accurate share counts.
📚 Academic Foundation:
Our methodology borrows from established academic finance research:
- Earnings-Based Risk: Ball & Brown (1968), Beaver et al. (1970), Dichev & Tang (2009)
- Earnings Quality: Sloan (1996), Dechow & Dichev (2002)
- Financial Distress: Altman (1968) Z-score model
- Equity Risk Premium: Damodaran (2025) - 4.21% mature market base, adjusted for U.S. credit rating changes
- Growth Model Selection: AIC/BIC criteria (Akaike 1974, Schwarz 1978)
⚠️ Important Note: This model is designed to detect market mispricing, not to match market prices.
Large differences between our intrinsic value and market price may indicate:
- Market over/under-valuation (our goal: identify these opportunities)
- Non-EDGAR factors the market is pricing in (e.g., brand value, network effects, future expansion not yet in financials)
- Recovery patterns from temporary disruptions (e.g., COVID) that our 15-year analysis may not fully capture
Model Simplicity is a Strength: We intentionally avoid "fixing" every outlier. Discrepancies highlight where the market may be mispricing companies or where non-financial factors drive valuations.
📋 Data Quality & User Verification:
We have fixed many data extraction issues, but some stocks may still fail to process. We have not yet fully investigated the root causes of all processing failures. Additionally, extracting accurate share counts for companies with multiple share classes has proven particularly challenging.
When reviewing results, please verify:
- Share Count: Confirm the shares outstanding figure matches your research (check against company investor relations or recent 10-K filings)
- First Year Projections: Review the projected free cash flow for Year 1—does it seem reasonable given recent trends?
- Growth Projections: Form your own view on whether the projected growth rates (short-term and terminal) align with your understanding of the company's business model, competitive position, and market dynamics