How It Works

Philosophy

The GreenDot Strategy is built on a single conviction: long‑term outperformance over a 3–5 year holding period comes from owning three things together — quality businesses, sustainable growth, and a reasonable price. The screen enforces all three simultaneously, and the AI reports help confirm the real-world story behind the numbers.

• Quality businesses — FCF‑ROIC measures how efficiently a business converts invested capital into free cash flow. High and sustained ROIC is only possible with a genuine economic moat — network effects, switching costs, proprietary data, or brand loyalty that prevents competitors from eroding returns. Before buying, it is worth confirming in practice that the moat is real and widening, and that the business is led by a strong team — ideally founder‑led, with significant skin in the game and a long‑term ownership mindset.
• Sustainable revenue growth — multi‑year growth requirements (≥10% across current year, next year, and 3‑year average) filter out one‑off surges. In practice, what makes growth durable is revenue quality: subscription, “toll‑booth”, and other deeply embedded recurring‑revenue models produce predictable cash inflows that are far more reliable than project‑based or transactional revenues. High net revenue retention — where existing customers spend more over time — is the strongest signal of durable growth.
• Reasonable valuation — even the best business is a poor investment if you overpay. The blended price target and margin of safety provide a quantitative check on entry price. A meaningful cushion below fair value absorbs model error and market volatility, giving the compounding time it needs to work over the holding period.

Screening Criteria

• Rule of 40 — revenue growth rate plus free cash flow return on invested capital (FCF‑ROIC) must exceed 40%. Both the current‑year and next‑year estimates must clear this threshold.
• Sales growth — current‑year, next‑year, and 3‑year average revenue growth must each be at least 10%.
• Sector exclusions — Materials, Real Estate, and most financials (banks, insurance, etc.) are excluded because their ROI calculations are structurally different and not directly comparable.

Business Ranking

Every stock on the screen has already cleared a strict quantitative filter — all of them are above-average businesses by the numbers. The Biz Ranking goes one layer deeper, asking: which of these companies has the best underlying business quality? It ranks the stocks in the current batch against each other on four qualitative criteria, then assigns a colour using a forced distribution so the labels always mean something relative to the peer group.

• Revenue recurrence — how predictable and sticky is the revenue stream? Subscription and “toll‑booth” models with high net revenue retention rank highest; project‑based or transactional revenue ranks lowest.
• Revenue growth potential — how much runway does the company have to keep growing its top line? A large addressable market with low penetration and a durable competitive position is the ideal.
• Economic moat strength — how durable and wide is the competitive advantage? Strong moats are built on network effects, switching costs, proprietary data, or entrenched brand loyalty that make it hard for competitors to erode returns over time.
• Founder-led or long-tenured management — is there high-conviction leadership in place? Founder‑operators and executives with significant tenure and skin in the game tend to take a longer view and make better capital allocation decisions.

The four criteria are weighted equally. Rankings are determined by AI analysis and then mapped to colours using a fixed distribution:

• Green — top 50% of the batch. The strongest business quality among current screen members.
• Yellow — middle 25%. Solid businesses with at least one criterion that lags the top tier.
• Red — lower 25%. Still pass the quantitative screen, but rank lower relative to peers on business quality fundamentals.

Because the ranking is relative to the current batch, a Red Dot stock today could become Yellow or Green as the composition of the screen changes — and vice versa. The colour reflects standing within the peer group, not an absolute judgement on the business.

Valuation & Margin of Safety

• Price Target — a blended figure combining the analyst consensus price target with an independent discounted free cash flow (DCF) valuation. Blending the two reduces over‑reliance on either Wall Street estimates or model assumptions alone.
• Margin of Safety (MoS) — measures how far the current price is from that blended target: (Price Target − Last Close) ÷ Last Close × 100. A positive number means the stock is trading below target (potential upside); a negative number means it is trading above target.
• Undervalued — MoS of +10% or more. The stock appears to offer a meaningful discount to its estimated fair value.
• Fairly Valued — MoS between −10% and +10%. Price is roughly in line with the blended target.
• Overvalued — MoS of −10% or worse. The stock appears to be trading at a premium to its estimated fair value.
• These thresholds are guidelines, not guarantees — price targets carry model uncertainty and analyst bias. Use them as one input alongside the AI reports.