My Updated Step-by-Step Guide to Outperformance

343.23% over 21 months. Here’s the full investing workflow behind that result, from sourcing and filters to final buys and beyond.

Welcome to 📉 DeepValue Capital 📈

This post is for investors who want clarity, structure, and results.

Not noise.

This is my full investing framework, refined constantly as I learn, improve, and test in the market.

I update this every so often so be sure to book mark it and revisit it for my constantly refining thinking.

Inside, you’ll get:

• How I generate ideas no one’s talking about

• The filters I run every stock through

• My approach to valuation, conviction, and sizing

• How I use options (and when I don’t)

• How I manage risk without playing scared

• What happens after I buy

Let’s jump in.

Finding Companies, Where It All Starts

Before I dive into research or valuation, I need names on a list. This step isn’t about quality or conviction. It’s about gathering potential threads to pull.

Many of my ideas outside of my watchlist come from non-traditional investors. People who go deep on sectors that don’t get much airtime.

I listen to podcasts, read on Substack, and watch YouTube videos. I’m looking for undercover companies no one is talking about.

If someone mentions a company I haven’t seen before, I do a quick scan:

• Is it in an industry I understand?

• Is the industry growing?

• Is it a company I have never looked at?

If the answer is yes, it goes on an idea list. That’s it. No analysis yet. Just a name to come back to. If it is one I have seen before it is likely already been moved to a watchlist.

My Living Watchlist

I use Stock Unlock to track everything I’ve already looked at.

If I decided previously they would be interesting at a lower price it has a price target set. If the stock drops near that level, it automatically moves back onto my radar. And onto the idea list to look into again.

When I Go Hunting

If nothing comes up from those first two lead generation methods I turn to screeners.

I might:

• Sort by P/FCF or P/S.

• Filter for names down significantly from highs.

• Or scroll alphabetically through a sector I know has been beaten down.

I use Finviz and Stock Unlock to run these screeners and change them often just to find companies I haven’t looked into yet that might be interesting.

These companies must pass the same filters as before.

My Filtering Rules

I mentioned I only track companies in industries I understand.

That doesn’t mean I need to know the company itself yet. But I should have a basic idea of what risks the industry faces and how they make their money.

These are industries outside my circle of competence or ones I just don’t like:

• Pure AI

• Airlines

• Banks

• Biotech

• Car Manufacturers

• Insurance

• Marine Freight

• Precious Metal Miners

• Restaurants

• Pure Robotics

• Tobacco

• Textiles

• Most Software

It’s not that they’re un-investable. I just know I’m not the right person to evaluate them. They fall outside my circle of competence or I just don’t like their business models.

I also want to be reasonably sure the industry itself will grow at least at GDP-level or better in the coming years.

It is hard when they have to also fight against the structural headwind of shrinkage so I avoid it.

A lot of the best ideas I’ve found start with broken charts.

If a stock is down 60%, 80% or more from all-time highs, that doesn’t mean it’s a buy. But it tells me the market has moved on. It tells me the story is probably broken and that’s where I often find mispricing.

I will almost always take a quick glance at their chart while looking at them and this gut check just helps establish another layer of interest.

I’m constantly gathering names. Some days that means a couple hours of searching. Other times it’s just a few quick notes after listening to a podcast or reading a write-up.

But this is always happening.

The edge doesn’t start with analysis. It starts with doing the gathering consistently.

Filter #1: Basic Financial Fundamentals

Once they are on my list the first filter checks the financial basics:

• ROCE or ROIC: Are they making efficient use of capital?

Typically I will look for a median of either or both to be above 10%. Notable exceptions are companies in cyclical industries. Often their median will be below this level however when cycles turn positive they can often be far higher.

EX: CPS has a median for both metrics over the last 20 years of about 8.5% but when the cycle up they are often in the mid teens or higher.

• Solvency: Any major debt issues?

This is a fairly quick check to see how leveraged their balance sheet is. I look at cash, current assets, current liabilities, long term debt, FCF, current ratio, and quick ratio.

Unless the balance sheet look terrible like long term debt that is 10x+ total cash AND they don’t have significant physical assets to back it up I won’t immediately disqualify a company based on debt.

• Dilution: Are they meaninglessly diluting shareholders?

This can come in many different forms.

Is management diluting shareholders at 5%+ per year to make acquisitions? That may be fine if I see revenue and FCF growing at a measurably quicker pace.

Is share count rising 5%+ per year to cover stock based compensation? That is a red flag.

Are shares being issued at 5%+ per year to pay debts and stay solvent? Very much a red flag and essentially immediate disqualification.

• Valuation: Is it “cheap” based on the current and normalized metrics?

Usually I will compare a few metrics to historical averages. Price to sales, price to gross, price to FCF, etc. If I see FCF is well below historical norms I will find a normal margin, apply it to current revenues to get a normalized price to FCF. These just help me gauge where we are today vs history.

A stock is not worthy of buying just because it is cheap by any given metric. One trading at 25 times FCF might be cheap while one trading at 10 is overvalued.

It depends on things like their growth, capital use, industry, current margins, and many other things. Even a currently unprofitable company could be cheap if they are at the bottom of a cyclical downturn.

You get a sense for what you are looking for the more times you do it. All to say, get to work looking! (Or let me do the work for you!)

Example: Walmart ($WMT)

• Revenue growth: ✅ 4.33% annually over 20 years

• FCF growth: ✅ 6.6% annually over 20 years

• ROIC: ✅ 15.39% average over 20 years

• Solvency: ✅ Current ratio of 0.78

• Shareholder Dilution: ✅ Shares have decreased by 2.25% per year

• Valuation: ❌ Walmart trades at 56x FCF, meaning a very low FCF yield (about 1.78%, not worth it for me).

So, Walmart goes on the watchlist with a target price of around $34 or 20x P/FCF. Which is still certainly too high, but will be worth another look at that price. (It is often the case the price I set is significantly below current levels.)

Filter #2: More In-Depth Financials

Next, I dive deeper into the financials. I repeat the first filter to catch anything that slipped through. Then, I look at the following:

1. How has the business performed during other cycles?

I like to see a business that has bounced back and get a feel for how that happens. If they go into several quarters of negative FCF normally or revenue growth slows. Just so I can compare the current trough and if it is comparable to what has happened before.

2. Is there any clear downtrend in margins indicating eroding advantages or pricing power?

If I spot any worrying signs here it is very likely this goes into a permanent pass list. (Which despite the name it can come off of if we get new management that fundamentally changes the business.)

3. Are there industry pressures either good or bad I didn’t know about?

I need a deeper feel for the head or tailwinds driving this business. Are they short term or long term?

4. On a basic level how do their margins, returns on capital, and growth compare to competitors?

This will help me gauge where the company sits. I am not always looking for the top #1 or even #2 player but if they are obviously the bottom of the barrel it is not a company I want to invest in. It would go into my permanent pass list.

Filter #3: The Qualitative Deep Dive

For this filter I’m reading reports, listening to earnings calls, and trying to get a feel for the company qualitatively.

• Do they have a competitive advantage?

In practical terms I am looking for a company who does something that is difficult to copy in one way or another. This could be low cost, innovative products, high switching costs for customers, regulation, scale, high cost barriers, etc.

• How transparent is the management team?

• Does leadership have a track record of high shareholder returns in past roles or their current one?

• What issues is the company facing? How are they overcoming them?

• What is managements pay tied to? EPS? FCF?

I am looking for a transparent honest management that has incentives that are at least decently aligned with shareholders. If they have a track record of terrible promises, flowery vague language, or other things like that I will have to make a decision on if they are a permanent pass or just need a lower price.

I always keep this Charlie Munger quote in mind during this research. “Show me the incentives, and I will show you the outcome.”

• Are there any catalysts or turning points that could cause the business or perception of the business to change?

For any investment I make there need to be some catalysts coming down the pipeline that buck the narrative. Otherwise cheap companies can stay irrationally cheap for a very long time.

This can be so many different things. Increased margins, regulatory clearance, new leadership, expectations beat, faster growth, falling interest rates, demographic tailwinds, FX tailwinds, fundamental demand drivers, divestitures, or more likely a combination of several of these.

It takes time and work to identify potential catalysts for a company but if I struggle to find any I will always pass.

Filter #4: Valuation

Now that I’ve done the work, it’s time to determine what the company is actual worth.

I would consider this to be the area where I have far less skill and knowledge compared to the others. As of today I don’t do any complex modeling and actually believe you shouldn’t ever need complex models because an idea should be obvious.

And because a model will always be just that, a model. It will likely be wrong so I want to keep things simple by getting a general and reasonable idea of valuation in a sensible time frame.

As of today I model out the following.

• Revenue (By segment depending on the business.)

• Operating Cash Flow Margins

• Capex

• FCF Multiple

• Change in Shares Outstanding (If there is no clear direction I will leave share count flat.)

I feel these keep things in a sweet spot of enough modeling and thinking to get a good idea of the companies future while also be simple enough to not be convoluted.

I make my estimates often by tracking where the company has been and the changes I see happening forecasted out.

For a company that cut a significant amount of costs and is not increasing them as revenue rises I will happily model out better margins than past cycles. For revenues I can assess the industry baseline growth, company initiatives, long term targets they set and other catalysts to get a good idea.

When I am trying to decide a companies multiple I feel this is by far the most subjective and difficult one to forecast. Short term multiples are often determined by sentiment so predicting that years out is difficult. So I try and assign a level I feel is appropriate based on the following.

• Business Quality (ROIC/ROCE and Competitive Advantages)

• Historical Multiples

• Growth

• Leverage

• Risks

I do lean heavily into company and industry norms when thinking about the multiple. A cyclical company will always have a lower baseline multiple regardless of its quality just because of the risks of down turn. A healthcare company will almost always have a higher baseline because of the regulation, time, and cost behind any products.

The best way to think about how I do this is by finding an industry baseline and then adjusting from their for the individual company. Do they have above average growth? Maybe that is worth a small bump up. Do they have higher debt than competitors or historically? Worth a small bump down. Hopefully you get the idea.

The Decision, Should I Invest?

At this point, it’s decision time. I compare the stock’s expected returns with those of my current investments and weigh my conviction level. These two last comparisons let me know if it belongs in my portfolio or if I need to wait for a lower price.

Example: Comparing CPS (High Conviction, 72% CAGR)

• Stock 1: High Conviction, 40% CAGR

• Stock 2: Medium Conviction, 60% CAGR

• Stock 3: High Conviction, 80% CAGR

First, lets assume I have cash ready to deploy. In that situation stock 3 would be my best available option. Meaning I should not add CPS but rather should buy more of stock 3. However, if stock 3 is already at its max position size, or I need more diversification, CPS is the next best option.

If I have no cash to invest, I might sell a lower-return stock to fund the new position or add to a current one.

I will only sell a position if the other option has much better expected returns, it has a similar or better conviction level, and even without it I am well diversified across 6+ industries.

My rules here are designed to be straight forward but also have barriers before I would replace any current position.

Weaving in Options

Options play a key role in my portfolio, so I use them when the right opportunity comes up.

The only options I buy are long dated calls. Long dated calls help avoid some of the timing issues while giving you outsized return potential.

An important rule for adding options to my portfolio is at the time of purchase, the new position cannot move my total options positions to more than 15% of the portfolio. Options have very real risk of going to 0. I don’t want to be overexposed to that possibility.

Calls

When buying calls I usually look at the longest dated options available but it must be at minimum 12 months out. They must also be liquid with a fairly tight bid to ask ratio. Generally this means it needs to have volume on the day and a bid to ask with a gap less than 5% of the stocks value. These already rule out most companies.

If a stock meets that criteria then my next filter looks at implied volatility. This is something that I think comes more with time spent looking at options and their pricing. Implied volatility has a huge impact on options pricing so I look for a time when this is around average or lower to take a position.

I weigh where I think the stock will move over the next 1-3 years depending on the date of the option I prefer. I want to find options where it is almost certain the stock will create 3 times my cost in intrinsic value for the contract at expiration. I make that estimation based on my price forecasts after doing research on catalysts, fundamental drivers, etc.

Meaning if I buy a $5 option with a $50 strike, I want high confidence the stock will reach at least $65, 3x my cost above the strike.

If everything above is met and I have room in the portfolio, I take a position. Often looking to get 2, 3, 4, or even more times my money.

Position Sizing Matrix

How I decide what % of the portfolio to allocate based on conviction and expected returns.

How to Read This:

• Conviction is based on how much needs to go right.

  • Low: Several risks need to be overcome.

  • Medium: 2–3 things need to play out.

  • High: Odds are heavily in my favor with few risks to overcome.

• Return expectations are based on base-case CAGR

• The first percentage are starting weights. I may scale up if conviction holds and the stock price falls to the higher percentage which is the max position size.

Risk Management Rules

• Max positions: 12

• Max option exposure: 15% of portfolio.

• Maintenance margin buffer: Must stay 40% below current holdings value.

• Max leverage: Normally capped at 15% of holdings value, but scales to 35% as markets falls from highs:

  • S&P 500 drops 10% = 20% leverage

  • 15% drop = 25%

  • 25% drop = 35%

“Markets can remain irrational longer than you can remain solvent.” - John Maynard Keynes

This quote is always in my mind as I add leverage so I consistently check to keep myself far from danger while also using it to enhance my returns.

Work after the Purchase

After I buy, the work isn’t done.

If anything, it’s just starting.

I keep up with every company I own, consistently reviewing earnings, watching how key catalysts play out, tracking management communication, and checking in on the risks I flagged when I first made the investment.

Conviction doesn’t come from having a high CAGR estimate in a spreadsheet. It comes from understanding how the real business is evolving over time. And that means staying close to the story.

This part of the process is messier. It’s not just math. It’s tracking things like:

• Whether the catalysts I expected are actually showing up

• If management is saying one thing and doing another

• If margins are shifting in a way I didn’t model

• If competitors are suddenly pulling ahead

• Or if macro risks, like April’s tariff scare, might look terrifying but have limited fundamental impact

The April tariff scare is a good case study.. The headlines made it sound like the sky was falling. But because I had done the work, and was continuing to do the work, I saw the truth more clearly. I knew the companies I owned would take a hit, but not a fatal one. I added instead of sold. And I’m up significantly since.

That doesn’t happen by accident.

If I had let that fear take hold without re-grounding in the fundamentals, I might’ve sold something great, or chased a shiny new stock that just looked “cheaper.”

This is where psychology beats most investors.

I don’t try to conquer emotions with mindset hacks or willpower. I try to beat them with information. If I understand what’s really happening, I’m less likely to panic. I can step back, zoom out, and evaluate my positions based on the facts, not the fog.

That’s what conviction really is, a buffer between you and the noise.

It’s not about being stubborn. If something does change, if the facts break the thesis, I’ll walk. But I only know that because I’m paying attention.

It’s not glamorous. But it’s what helps me hold through volatility, avoid unnecessary trades, and stay focused on long-term upside.

That’s how I protect myself from fear, stay focused on what matters, and give great setups the time they need to work.

A Disciplined Approach to Outperformance

Every step in my process from screening to options plays is designed to maximize returns while lowering risk. It’s about finding companies that not only look cheap but have strong fundamentals and a clear path to growth. By staying disciplined, I avoid costly mistakes and position myself for long-term success.

This framework has helped me consistently outperform this year but remember, investing is a long game. The key is patience, conviction, and sticking in your circle of competence.

Thanks for reading!

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