Elements of Quality Value Investing | Part Two of a Series
The best of the QVI newsletter series on how the quality-driven value investing strategy prevails for those seeking to outperform their market benchmark
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In this second part of a series, we’ll expand on the principles, strategies, and practices that make up the checklist of metrics used to select primary tickers for Quality Value Investing’s (QVI) alpha-achieving Real-Time Stock Picks.
The QVI newsletter narrative posts teach the essential elements and reliable indicators for identifying high-quality companies whose stocks are temporarily trading at fair or discounted prices.
By emphasizing research on a company’s current wealth and a stock price’s present value, QVI’s 42 picks have collectively outperformed the S&P 500 index by 10,384 basis points (bps) or 103.84 percentage points, based on the average per holding since 2010, using an equal-weighted approach.1
The seven current holdings of the QVI Current Stock Picks in our family’s concentrated portfolio have collectively outperformed the market by 43,711 basis points or 437.11 percentage points, based on the average per holding since 2010, using the same equal-weighted approach.
The subject matter objective of this post is how to embrace the perils and promises of self-managed common stock investing, plus infinite wisdom from the late Charlie Munger.
Defining the Business’s Value Proposition
How well investors know and understand the competitive landscape of the products or services of the publicly traded companies represented by the shares they own is essential for building a market-beating portfolio of common stocks.
Here’s how to define a company's value proposition for its products or services and then confidently communicate it through an elevator pitch. At a minimum, investors should evaluate the business’s competitive advantages during the stock’s due diligence.
The Intrinsic Value of an SEC Filing
The most reliable data available for the enterprise comes from its filings with the U.S. Securities and Exchange Commission (SEC) or any country's financial regulatory authority.
As the basis of comprehensive investment research, reading the Form 10-K Annual Report or its equivalent and reviewing the investor relations website are top priorities for private investors.
Profitable retail common stock portfolios resemble collections of shares in well-managed companies that produce in-demand products or services with lasting competitive advantages.
Illustrate the Value Proposition with a Crayon
In his book, Beating the Street (New York: Simon & Schuster, 1993), Peter Lynch emphasizes the importance of understanding what we are investing in without falling into analysis paralysis.
“Never invest in any idea you can’t illustrate with a crayon.”2
Successful do-it-yourself investors don't buy something just because it sounds or feels right. Instead, they invest their hard-earned money in the common shares of companies they understand and value.
The Value Proposition Elevator Pitch
Start by pinpointing the business’s competitive advantages in a short elevator pitch, which should be one or two sentences or phrases. Here are some examples:
NIKE's ($NKE) Swoosh is the moat, as wide as the iconic logo.
Coca-Cola ($KO) is a legendary global powerhouse with a ubiquitous brand name that probably isn't going anywhere except consumers' refrigerators, pantries, and cupholders.
Visa ($V) is a well-known name in global electronic payment processing, where half of its revenues go directly to net profit. That’s a powerful business model, if not outright highway robbery.
Caterpillar ($CAT) is one of the world’s most valuable and recognizable brands that delivers reliable, high-quality products while providing the lowest total cost of ownership.
NVIDIA ($NVDA) provides unmatched graphics performance for gamers and is now fully committed to "addressing the world's visual computing challenges" through top-tier artificial intelligence solutions.
Measuring the Quality of Business Models
While it's essential to concentrate on the core structure of the business, keep in mind that senior management, along with the board of directors, shareholders, employees, customers, vendors, and the community, are the ones who produce, deliver, and consume the goods and services.
Discover prime examples of C-suite-driven metrics of publicly traded companies to analyze when measuring the fundamentals of quality business models.
Assessing Management Effectiveness
Understanding how senior management performs is key to owning parts of successful companies.
QVI key metrics: revenue growth, gross and net profit margins, return on equity, return on invested capital, and owners’ earnings.
Remember the Internal Customer
A unique approach of thoughtful investors is measuring employee satisfaction, including the rank-and-file evaluation of the chief executive officer (CEO).
Satisfied employees tend to produce high-quality products and provide excellent services, leading to loyal customers and lasting profitability.
Numbers Don’t Lie — While Humans Do
When a company beats or misses the Wall Street sell-side analysts’ earnings estimates, the question arises, “Who are the actual winners and losers: the management or the analysts?”
Measuring actual returns on management compels rational, disciplined, and patient investors to allocate valuable capital to quality companies held long-term to benefit from the compounding returns generated by skilled capital allocators.
Quantifying a Stock’s Equity Bond Rate
The shareholder yields section of the Quality Value Investing research report reveals the equity bond rate of the company’s common shares. It aims to quantify the yields on earnings, free cash flow, and dividends to assess how the targeted stock compares to the current yield on the 10-Year Treasury benchmark note.
QVI’s proprietary equity bond rate modeling indicates whether a stock justifies the assumed higher risk profile compared to the perceived safer intermediate-term government issue.
Earnings Yield
The earnings yield is the annualized trailing earnings per share (EPS) divided by the stock’s closing price.
Earnings yield is the inverse of the price-to-earnings ratio or P/E and is expressed as a more practical percentage rather than the P/E multiple, offering a yield profile similar to a bond rate.
Free Cash Flow Yield
Free cash flow yield indicates how much free cash flow a business produces each year per common share relative to its stock price.
Free cash flow enables senior management to increase shareholder value by pursuing capital deployment opportunities such as research and development, mergers and acquisitions, dividend payments, share repurchases, and debt reduction.
Dividend Yield
The forward dividend yield shows how much a company expects to pay in dividends over the next twelve months relative to the current share price. The dividend rate is the total dollar amount of dividends paid during the previous fiscal year.
Unlike dividend growth investors, dividend value investors focus on maintaining dividend payments in the short term while waiting for the investment thesis and capital appreciation to unfold over time.
Calculate the Average of Total Yields
Next, calculate the average of earnings, free cash flow, and dividend yields per share.
Averaging the yields on trailing earnings, free cash flow, and dividends offers a snapshot of the stock’s performance relative to the benchmark Treasury rate. The Ten-Year Treasury yield is the published rate on the prevailing benchmark note.
An Alternative High-Yield Dividend Strategy
Focus on a stock's yield on cost rather than chasing current dividend payments.
The return on cost indicates the dividend yield based on the current dividend rate relative to the cost basis of the common shares.
Evaluating a Stock’s True Worth
A key principle of seeking stock investing nirvana or alpha is assessing the attractiveness of a stock price based on valuation multiples compared to the fundamentals.
In this section, we’ll examine specific valuation metrics to assess and compare the intrinsic value or margin of safety of the common shares of selected quality companies.
The Quality-Driven Value Strategy
For quality-focused, value-oriented investors, an appealing stock price is a requirement before taking partial ownership of an enduring company.
A confident calculation of the stock’s margin of safety offers a solid measure of a company’s intrinsic value based on recent or trailing metrics rather than speculative future cash flows and other uncertain projections.
QVI’s Preferred Intrinsic Value Indicators
Consider an investment strategy that combines quality and value as the best opportunity to generate compounding total returns over an extended holding period.
The earnings metrics used to develop and track the alpha-generating QVI portfolios include price-to-sales (P/S), price-to-trailing earnings (P/E), price-to-operating cash flow (P/OCF), and enterprise value to operating earnings (EV to EBIT).
Assessing Downside Risks
Managing downside risk is more dependable than trying to forecast future returns. A top priority for conservative investors is protecting their capital. Therefore, evaluating downside risk is an essential part of research and a key measurement tool for rational, disciplined, and patient investors.
Analyze company risk profiles to identify quality stocks with the likelihood of limited downside, helping to protect valuable invested capital. In this process, we grade individual common stocks based on various measures of investment risk.
Returns are Unpredictable | Risks are Manageable
Measuring, understanding, and accepting the downside price risk of a company and its common shares from a challenging market provides the best opportunities for investing with a tolerable, asymmetric risk/reward profile.
QVI concentrates on four critical business areas that evaluate the underlying stock’s measurable risk within the context of its potential behavior during a downturn market cycle: economic moat, long- and short-term debt coverage, price volatility or beta, and short interest as a percentage of the outstanding share float.
Manage the Downside | Let the Upside Take Care of Itself
A portfolio of quality companies bought at sensible prices that slightly underperforms the market when it's doing well has the potential to significantly beat the market during downturns, thereby increasing the chance to outpace the market over time. In other words, manage the downside while letting the upside take care of itself.
Assessing enterprise and share price downside risks is essential for the success of rational, disciplined, and patient investors.
Writing an Investment Thesis
The investment thesis explains why the company and its stock rate as a Buy (bullish or accumulate), Hold (neutral or watch), or Sell (bearish or avoid) based on the investor’s most recent research and analysis.
Try a checklist approach, like QVI’s proprietary equity analysis that uses a bottom-up strategy focused on the company’s current wealth and the stock’s present value.
A Quality Thesis Includes Ratings and Potential Catalysts
Rate the company and its common shares based on its current wealth, including the value proposition, management's returns, and enterprise downside risks, as well as the present value of shareholder yields, valuation multiples, and share price downside risks.
Although quality-driven value investors are skeptical of predictive analysis’s arbitrary and unreliable methods, they consider potential events or catalysts that would confirm or contradict the overall investment thesis.
The Eternal Wisdom of Charlie Munger
In the wisdom of the late billionaire investor Charlie Munger (January 1, 1924, to November 28, 2023), be a lifetime advocate for owning a concentrated portfolio of companies with high-quality business models whose shares are purchased at value prices and held long-term, including for generations.
Despite the financial services industry's propensity to convince most investors that stock investing is as complicated as rocket science and thus requires MBAs and high fee structures supporting (unreliable) predictive analysis and business modeling (overkill), it is a relatively simple practice, if not easy.
Conquer any fears and succeed at investing by simplifying the process.
Resources
QVI’s Research Reports Archive and Stock Picks Real-Time Performance Tracker provide the latest analysis and performance data for the 42 active QVI Stock Picks, including the use of this post’s proprietary research checklist.
The real-time final draft manuscript of my upcoming fifth book, Quality Value Investing: How to Pick the Winning Stocks of Enduring Enterprises, is now available on my author's website, hosted on Substack.
Read or Listen to the Real-Time Manuscript
About the Writer
David J. Waldron is the contributing editor of Quality Value Investing and the author of the international-selling book Build Wealth with Common Stocks: Market-Beating Strategies for the Individual Investor, as well as his upcoming fifth book, Quality Value Investing: How to Pick the Winning Stocks of Enduring Enterprises.
He is a private investor and a former expert advisor to hedge funds, mutual funds, private equity firms, and investment banks.
David’s mission is to inspire his readers to reach their financial goals and dreams. His work has been featured in Substack Finance, Substack Business, Seeking Alpha, MSN Money, TalkMarkets, ValueWalk, Yahoo Finance, QAV—Australia’s #1 Value Investing Podcast, Money Life with Chuck Jaffe, LifeBlood with George Grombacher, The Acquirer’s Multiple, Capital Employed, and on platforms like Amazon, Barnes & Noble, Apple Books, The BookLife Prize, and Publisher’s Weekly.
David enjoyed a 25-year career as an executive in postsecondary education services. He earned a Bachelor of Science in Business Studies as a Garden State Scholar at Stockton University and completed The Practice of Management Program at Brown University. Learn more at davidjwaldron.substack.com.
“Investing advice is fairly commonplace, but here the author shares his own unique investment wisdom that readers will not find elsewhere.” —Critic’s Report, The BookLife Prize (Publishers Weekly)
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Disclosure: As of this post, our family’s concentrated portfolio held beneficial long positions in the common shares of seven companies listed in the QVI Real-Time Stock Picks. I authored this report, sharing my opinions without any compensation beyond the paid subscriptions on Substack or the royalties from the sales of my published books. I have no business relationships with any of the companies represented in the QVI Stock Picks.
Additional Disclosure: David J Waldron’s Quality Value Investing newsletter posts are for informational purposes only. Data accuracy is not guaranteed. Narratives and analytics are impersonal and not tailored to individual needs or portfolio construction beyond the QVI Stock Picks, presented solely for educational purposes. David is a private investor and author, not an investment adviser. Readers should conduct independent research or due diligence and consider consulting a fee-only financial planner, a licensed discount broker, a flat-fee registered adviser, a certified public accountant, or a specialized attorney before making investment, tax, or estate planning decisions.
Disclaimer: Although Quality Value Investing takes a skeptical view of the financial services industry, commonly referred to in the media as Wall Street—a euphemism for professional or institutional investing globally—it does not imply nor express specific issues or negative references regarding any actual organizations or individuals working within the financial sector. Any perceived connection or offense to actual firms or individuals is coincidental and unintentional. In its general critique of the universal Wall Street business model, QVI avoids unproven conspiracy theories and offers a platform for commentary, critique, education, and parody. In this context, facts stand apart from any alternative perspectives. Therefore, the subjective thoughts shared by the author throughout the post are his opinions and should not be construed as factual.
Source: Quality Value Investing via Google Finance. Combined stock picks’ performance data as of the market close on July 14, 2025. Past performance is not indicative of future results. Please read the important disclosures at the end of this post.
Peter Lynch and John Rothchild, Beating the Street (New York: Simon & Schuster, 1993, 1994), 27.