Better Investor Project

Category: Picking Winners By Industry

How to pick stocks by industry, not headlines. Define the lane, rank true peers, and turn screeners into a repeatable buy list.

  • Picking Winners by Industry — Step 2: Quality First (Unit Economics + Balance Sheet)

    This is the next brick in the series. In Step 1 we set the lane and built a clean, tradable universe; in Step 2 we tighten that universe with straightforward “quality first” checks—can these businesses earn good returns, convert to cash, and carry sensible balance sheets. I’m not claiming this is the only way to invest; it’s the process I’m using because it forces clarity and helps me make informed decisions. If you see a better tweak, say so—I want this to be useful, not dogma.

    I’m running the exact saved screener from Step 1 inside StockAnalysis.com (same industry, exchanges, country, primary listing, and basic liquidity) and adding quality filters on top. You can follow along with the free version; I use Stock Analysis Pro so I can save and reuse screens as the series progresses. If you decide to upgrade and use my link, I may earn a commission: https://stockanalysis.com/pro/?ref=betterinvestorproject

    What Step 2 does (one line)

    Keep a short list of non-negotiables, then rank everything else—so strong near-misses stay in view instead of getting cut.

    Gate A — Unit economics (earn it, convert it)

    Core (must pass)

    • ROCE ≥ 10%
    • FCF Margin ≥ 5%
    • Operating Margin ≥ 0% OR FCF Margin ≥ 8% (pick one path)
    • Revenue Growth 3Y ≥ 8%

    Flex (score, don’t hard-cut)

    • Gross Margin ≥ 55% (Software-Infra; otherwise use ≥ industry median)
    • EPS Growth (soft): use EPS Growth Years ≥ 1 or EPS Growth 3Y ≥ 8% as a plus—not a gate

    Nice tie-breakers for later ranking: ROCE (5Y), operating-margin trend, revenue per employee, FCF per share.

    Gate B — Balance sheet (quality without fragility)

    Core (must pass)

    • Debt / EBITDA ≤ 3.0
    • Interest Coverage ≥ 5
    • Current Ratio ≥ 1.2
    • Shares Change (YoY) ≤ 8% and (QoQ) ≤ 3%

    Flex (score, don’t hard-cut)

    • Altman Z-Score ≥ 2.5, Piotroski F-Score ≥ 5 (accounting can be noisy—treat as soft)

    Hard pass red flags (still out): negative trailing FCF margin, SBC/Revenue > 20% (software), Debt/FCF > 4, Short % Float > 15% without a near-term, real catalyst.

    StockAnalysis.com — exact filters to add (start from your Step-1 saved screen)

    Unit economics

    • Return on Capital Employed ≥ 10 (or Return on Capital (5Y) ≥ 10 if ROCE missing)
    • FCF Margin ≥ 5
    • Operating Margin ≥ 0 (and optionally add FCF Margin ≥ 8 if Op Margin < 0)
    • Revenue Growth 3Y ≥ 8
    • (Soft, optional) Gross Margin ≥ 55; EPS Growth 3Y ≥ 8 or EPS Growth Years ≥ 1

    Balance sheet

    • Debt / EBITDA ≤ 3.0
    • Interest Coverage ≥ 5
    • Current Ratio ≥ 1.2
    • Shares Change (YoY) ≤ 8
    • Shares Change (QoQ) ≤ 3
    • (Soft, optional) Altman Z-Score ≥ 2.5, Piotroski F-Score ≥ 5

    Keep Step-1 gates on: Market Cap ≥ $1B, Average Volume ≥ 300k, Dollar Volume ≥ $10M, Stock Price ≥ $5, Is Primary Listing = Yes, Exchange = NYSE/NASDAQ (AMEX only if liquid).

    Save this screen: “Step 2 — Quality & Balance”

    A simple quality score you’ll use in Step 3

    When ranking survivors, weight the essentials; near-misses can still win on total score:

    • ROCE 30%
    • FCF Margin 20%
    • Operating Margin 10%
    • Revenue Growth 3Y 10%
    • Gross Margin 10%
    • Debt/EBITDA (inverse) 10%
    • Interest Coverage 5%
    • Dilution (YoY shares, inverse) 5%

    Friendly guardrails for Step 2

    Keep valuation and technicals out of this step. Don’t bend core gates, but let flex items contribute to the score. If a favorite misses a flex threshold by a hair yet crushes ROCE/FCF/leverage, keep it in Tier B and let the ranking decide.

    Where we are, where we’re going

    You now have a broader but still disciplined list—businesses that mostly clear quality bars, with room for near-misses to prove themselves. Next in Step 3, we’ll sanity-check valuation (mid-cycle EV/EBIT, EV/EBITDA, FCF yield—PEG only as a tie-breaker) and build a composite rank so fairly priced quality rises to the top.

  • Picking Winners by Industry — Series Intro

    This is Part 1 of a step-by-step series on how to pick winning stocks by industry. We’ll move in tight, logical stages: define the lane (today), build a tradable universe, layer on quality and balance-sheet filters, set valuation bands, add timing rules, then publish a repeatable shortlist.

    Throughout this series I’ll use StockAnalysis.com for screening, research pages, and saving watchlists. There’s a free version; it’s enough to follow along. I recommend Stock Analysis Pro for saved screens, unlimited access to all data and tools, and many other useful features.

    Step 1: Pick the Right Lane (How to Choose an Industry Before You Touch a Ticker)

    You don’t start with a “hot stock.” You start by choosing a lane where the businesses share the same economics. Do this right and everything downstream—screening, comps, valuation, timing—gets easier and cleaner.

    What “industry” means (and why it matters)

    • Sector = giant bucket (e.g., Technology).
    • Industry = narrow slice with similar revenue drivers and cost structures (e.g., Software – Infrastructure).
    • Compare companies inside the same industry. Cross-industry comps are noise.

    The rule: narrow until the economics rhyme

    You want companies that:

    • sell to the same customer,
    • face the same inputs,
    • share the same cycle.

    If those three don’t match, you’re mixing apples and lawnmowers.

    How to define the lane in a screener (hard, simple switches)

    • Industry: target industry (example: Software – Infrastructure).
    • Exchange: NYSE, NASDAQ. Skip NYSEARCA/BATS (ETFs). NYSE American only if liquid (≥$1B mkt cap, ≥300k avg vol, ≥$10M dollar vol).
    • Country: United States.
    • Is Primary Listing: Yes (avoid ADR/duplicate tickers).

    Stop here. No quality or valuation yet. Clean scope first.

    Deal with mislabels without wasting a day

    Taxonomies differ (GICS/ICB/NAICS). You’ll see oddballs. Let the industry toggle pull a first draft, then manually remove non-peers and add back true peers that got misfiled. Two minutes scanning business descriptions is enough.

    Minimum tradability so you’re not analyzing ghost

    Even in Step 1, kill the unbuyable clutter:

    • Market Cap ≥ $1B
    • Average Volume ≥ 300k
    • Dollar Volume ≥ $10M
    • Stock Price ≥ $5

    This is not “quality.” It’s “I can actually get in and out.”

    How to do Step 1 in Stock Analysis (with screenshots) 

    The walkthrough below demonstrates Step 1 using the Software Infrastructure industry in the United States. You’ll set the screener to that lane, apply basic tradability gates, and save the “base universe” you’ll reuse in later steps. Swap “Software Infrastructure” for any other industry later—the process is identical.

    Goal: define a clean, tradable industry lane. No quality/valuation yet.

    Where to click: Stocks -> Stock Screener

    Add these filters:

    • Industry: e..g Software Infrastructure
    • Exchange: check NYSE, NASDAQ
    • Country: United States
    • Is Primary Listing: Yes
    • Minimum tradability (still Step 1):
      • Market Cap ≥ $1,000,000,000
      • Average Volume ≥ 300,000
      • Dollar Volume ≥ $10,000,000
      • Stock Price ≥ $5

    Save the screener: Saved Screens -> Select Saved -> Enter label (e..g US Software Infra)

    Where We Stand Now

    You picked a precise industry lane and built a clean, tradable universe: primary U.S. listings only, no ETFs, no illiquid junk, and no misclassified outliers. You locked in simple, repeatable screener settings (industry, exchanges, country, primary listing) and added basic tradability gates so every name on your list is actually buyable. You also learned to sanity-check taxonomy labels and keep only true peers whose economics rhyme. That’s the entire point of Step 1—get the scope right before you judge any business.

    Next up (Step 2): we’ll layer in two hard quality filters—unit economics (ROIC, margins, free cash flow) and balance-sheet strength (Debt/EBITDA, Interest Coverage)—to strip out weak operators and leave a shortlist of durable, high-return candidates. Then and only then do we talk valuation and timing.