How DCF Tool screens for undervalued opportunities

Sep 30, 2021

In creating the Leaderboard, DCF Tool's primary goal was to leverage our ability to analyze far more stocks than any human could analyze manually to discover quality undervalued opportunities.
Our approach as followed this intent with several filters that limit poor performing companies from the results and fixed input parameters for consistent comparison.

Leaderboard Criteria

The leaderboard filters all tickers according to the following rules:

  • Share price must be greater than $10
  • Market cap must be greater than $500 million
  • Must have positive unlevered free cash flow for 4 out of the past 5 years

Our rule set was made to filter penny stocks, microcap stocks, and most importantly companies that have yet to produce positive, proven, stable cash flows to investors.
These simple rules eliminate many poor performers.

Input Parameters

When evaluating the DCF model for each ticker for the leaderboard, the following parameters are used:

  • Maximum growth rate: 20%
  • Discount rate: 9%
  • Terminal rate: 2%

The input parameters used here approach the growth and terminal phases of the company conservatively.
By capping growth rate, we have cut the sensitivity of any overly optimistic stock forecasts.
Finally, we use a fixed discount rate of 9%, consistent for all tickers and limiting the sensitivity of terminal value.

Purpose of Leaderboard

The leaderboard was created as one way to discover potentially undervalued opportunities.

As with any automated leaderboard, the specific reasons a company finds its way on this list are numerous and relevant research should be done to review in depth why DCF models suggest it to be undervalued.
All of the information provided is for research purposes only and should not be construed as specific investment advice, along with all other information found on this site.