How I Pick Strong & Undervalued Stocks (Step-by-Step Framework)

I’ve spent a lot of time refining a rules-based framework to filter strong companies and avoid junk. It’s quite strict — fewer than \~100 US stocks pass all stages. I’m open to criticism and improvements. Be as brutal as you want. ⸻ Step 1: Fundamental Analysis (Part 1 – Financial Strength Filter) First, I go to Jitta.com → search ticker → click Factsheet. A company must pass ALL 3 criteria: 1. Operating Cash Flow consistently positive for the last 5 years 2. Average Net Profit Margin ≥ 20% over the last 10 years 3. Average Interest Coverage ≥ 10 over the last 10 years If it fails any of these, I eliminate it immediately. ⸻ Step 2: Fundamental Analysis (Part 2 – Growth & Balance Sheet) Only stocks that pass Part 1 move here. I go to Morningstar.com → search ticker → click Key Ratios. The company must meet: 1. Revenue growing over the past 5 years (as long as it’s positive overall trend) 2. EPS growing over the past 5 years 3. Free Cash Flow must be positive (latest results must be positive; doesn’t need all 5 years) 4. Current Debt/Equity < 0.5 (Exception: capital-intensive businesses that intentionally use leverage) ⸻ Step 3: Moat Analysis If it passes both fundamental stages, I assess competitive advantage. I keep it simple: • I ask ChatGPT to rank the moat (fresh session to avoid bias) • Cross-check with Morningstar moat ratings and GuruFocus • I only invest in companies with a Wide Moat If it passes fundamentals but has only a narrow moat, I classify it as a growth stock instead of a core compounder. ⸻ Step 4: Valuation I go to Morningstar → Valuation → compare: Current PE vs 5-Year Average PE There are 5 scenarios: Scenario 1: PE < 30 AND below 5-year average → Good Value Scenario 2: PE > 30 BUT below 5-year average → Mid Value Scenario 3: PE < 30 AND equal to 5-year average → Fair Value Scenario 4: PE > 30 AND equal to 5-year average → Possibly Overvalued Scenario 5: PE above 5-year average → Overvalued Ideal buy zone: Scenario 1 Acceptable with higher risk: Scenario 2 Scenario 3: Case-by-case (may use technicals) Scenario 4 & 5: Watchlist only PS: I know there are many ways to do valuation such as DCF, PEG ratio and many more. However, I used PE ratio for its simplicity sake. ⸻ Step 5: Technical Analysis (Entry Optimization) I use TradingView. Tools: • 5-year chart • Trendlines • Support & Resistance If fundamentals are strong and valuation fits Scenario 1/2/3: • Buy when price touches bottom of trendline • If trendline breaks → buy retest • DCA into lower support zones Examples: INTU, FDS both broke below trendlines — next best move was DCA into support zones. ⸻ Automation Edge There are over 6,000 stocks on NYSE + NASDAQ. It’s impossible to screen manually. So I built: • A UiPath RPA bot to scrape Jitta data → auto-filter Stage 1 into Excel • Another bot to scrape valuation data → auto-remove overvalued stocks After filtering, I manually do: • Fundamental Part 2 • Moat analysis • Technical execution ⸻ Final Thoughts This is a strict framework and naturally limits opportunities. My goal is: • Avoid weak businesses • Avoid overpaying • Focus on durable compounders • Optimize entries Would love feedback: • What blind spots do you see? • What would you improve? • Am I over-filtering? Be honest — I’m here to refine it. Last but not least, let me know in the comments, if you guys are interested to see what are the filtered results. ⸻ PS: I typed out my framework and asked ChatGPT to format it so that everyone can read it easily and clearly :)