Lubin Investment · Blog

Spotting an excellent and cheap stock

2026-06-11 ·

I always separate two questions: is the company excellent, and is the price low. A quality score out of 10 judges the business without looking at the stock price. Then the P/FCF, compared to its own past, judges the price. When the two line up, I have a real opportunity.

The mistake that ruins most decisions

The first time I wanted to buy a stock, I made the blunder almost everyone makes: I looked at price and quality in the same second, as a single impression. "Nice company, cheap stock, I buy." Wrong. A great company bought too expensive is still a bad investment. A mediocre company, even dirt cheap, stays mediocre. As long as those two things blur together in your head, you make bad decisions without even noticing.

So I ended up splitting everything in two. One question: is this a good company. Another, entirely apart: is this a good price. I answer the first without ever looking at the stock price, then only the second. This article shows you exactly how I go about it, in two steps, with three real cases from June 2026.

Step 1: is the company excellent (quality)

I do not trust my gut, nor a brand's reputation. I run the company through ten objective numerical financial criteria, then sum it all up in a quality score out of 10. A 10/10 score says nothing about the stock's price: it says the business checks, one by one, my ten soundness criteria. It is a measure of the business, not a buy recommendation.

Concretely, these ten criteria look at: profitability, growth in revenue (sales) and in cash per share, share buybacks (the company shrinks its share count rather than wasting money), margins, Cash ROCE, debt, the conversion of profit into cash, and the cash cycle. If the company checks all ten, it earns 10/10.

Two terms deserve an explanation, because they are what separates a true cash machine from a company that looks nice from afar. The first: the free cash flow margin. Free cash flow is the money that truly stays in the bank once every bill is paid (salaries, machines, taxes). A free cash flow margin of 30% means that on 100 dollars of sales, 30 end up as genuinely available cash. Most companies top out around 10.

The second: Cash ROCE. It is the return on capital employed, but measured in real cash rather than accounting profit. In plain terms: for each dollar put into the machine, how much cash comes back out each year. A high Cash ROCE means the company turns its investments into available cash efficiently. To me, it is one of the most reliable signs of a good business. If you want the full detail of these ten criteria, I explain it in my methodology.

Why a score out of 10, and not just my opinion

Because my opinion fluctuates, and it lets itself be seduced by a nice story. A numerical score does not. It applies exactly the same ten criteria to every stock, with no soft spot. It is also my main filter against the trap I will describe below: if a stock is cheap but scores poorly, I walk away without regret.

Above all, the score settles the first question once and for all. Once I know a company is 10/10, I no longer have to debate its soundness. Only one thing is left to decide: whether the market is offering it to me at a fair price. And that is step 2.

Step 2: is the price low (judged separately)

To gauge what the market is asking, I use a simple ratio: the P/FCF (price to free cash flow), the stock's price relative to the free cash flow it generates each year. A P/FCF of 10x means you are paying ten years of that cash today. The lower it is, the cheaper it is. Meaning first, number second: a P/FCF of 1.1x would mean paying barely more than one year of the cash generated, so very cheap.

But a raw P/FCF says little on its own. 14x for a company, is that expensive or cheap. The only honest way to answer is to compare that number to what this same stock has paid in the past. That is where the percentile comes in. A percentile is a position in a ranking, from 0 to 100. Saying the P/FCF is at percentile 4 means it is lower than during 96% of its own past: the stock has almost never been this cheap. At percentile 0, it is the lowest point ever observed.

I prefer this measure to a plain "it is cheaper than the sector average", because it compares the company to itself. An excellent company often deserves a higher multiple than average. What I look for is not that it is the absolute cheapest on the market, but that it trades cheap relative to its own standard. When the percentile is in the bottom decile (the 10% cheapest of its history), the market is giving it an unusual price.

An opportunity is when the two line up

This is the heart of the method. I flag a stock as an "opportunity" only when both steps say yes at the same time: a 10/10 quality score AND a P/FCF at the low end of its own historical range. Not one without the other. It is rare, and it should be: an excellent business at an unusually low price does not grow on trees.

Three cases verified in June 2026, inventing nothing on the figures. RenaissanceRe (ticker RNR), a reinsurer, scores 10/10 and trades at 3.0x its free cash flow, at percentile 4: cheaper than during 96% of its past. MercadoLibre (ticker MELI), the Latin American e-commerce and payments giant, scores 10/10 at 6.8x, at percentile 0, the cheapest point ever observed. Roper (ticker ROP), a software conglomerate, scores 10/10 at 14.4x, at percentile 8.

Notice this: Roper trades at 14.4x, nearly five times more expensive than RenaissanceRe in absolute terms. Yet both are opportunities. Why. Because 14.4x is low for Roper, a company that has almost always deserved a high multiple. That is exactly why I compare each stock to its own past, and not just to its neighbors. You can find this kind of profile in my ranking of undervalued stocks.

The trap: cheap never means a bargain

This is the mistake I want to spare you. When a stock shows a very low P/FCF, the reflex is to cry bargain. Bad idea. A stock can be cheap for an excellent reason: the company is genuinely in decline, and the market is right to pay little for it. We call this a value trap. You think you are buying a discount, you are buying a decline.

That is precisely what the quality score is for. A low percentile, on its own, is never a buy signal: it is just a low price, and a low price can be perfectly justified. I only buy cheap what also scores 10/10. Quality first, price second, never the other way around.

The trap works the other way too, and it is sneakier. A 10/10 company can be a disappointing investment if you pay for it at the top of its history. Quality does not protect you from a bad entry price. That is why I never settle for the score alone: even for my stocks rated 10/10 on quality, I always check the P/FCF and its percentile before I move.

How I apply this, without emotion

My routine comes down to three gestures. One: I look at the score out of 10. If it is not excellent, I stop there, whatever the price. Two: if it is good, I look at the P/FCF and above all its percentile, to know whether the stock trades expensive or not relative to its own past. Three: I act only when the two line up, and otherwise I note the ticker and wait for the price to come to me.

This discipline has a freeing effect: it spares me from arguing with my emotions. I do not have to "feel" whether a stock is a bargain. I have two numerical answers, independent, and a simple rule to combine them. The market may panic or get carried away; my grid does not budge.

That is exactly what I wanted to be able to do in seconds for any stock: judge a business's quality on one side, its price on the other, and spot the rare cases where the two line up. Since I could not find the tool, I built it. You can type a ticker, like RenaissanceRe, to see its score out of 10 and its P/FCF percentile at a glance. Cheap is everywhere. Quality on the cheap, far rarer.

In plain terms

Spotting a stock that is both excellent and cheap is not a matter of flair, it is a matter of a two-step method. Quality is judged on ten numerical criteria, summed up in a score out of 10. Price is judged separately, with the P/FCF placed back in its own history via the percentile. The two never mix. And the real opportunity is only when both say yes.

FAQ

What is the quality score out of 10?

It is a numerical summary of a business's soundness, computed on ten objective financial criteria: profitability, growth in sales and in cash per share, share buybacks, margins, Cash ROCE, debt, conversion into cash, the cash cycle. A 10/10 score says the company checks all my criteria, independent of the stock price.

What is P/FCF, and why the percentile?

The P/FCF (price to free cash flow) compares the stock's price to the cash it generates each year. A P/FCF of 7x means you pay seven years of that cash. The percentile places that number in the stock's history: percentile 4 means it is cheaper than during 96% of its past.

Why judge quality and price separately?

Because they are two different questions. A great company bought too expensive is still a bad investment; a mediocre company, even dirt cheap, stays mediocre. By judging them apart, I spot the rare cases where an excellent business trades at an unusually low price, and I avoid mistaking a discount for a decline.

Is a low P/FCF always a bargain?

No. A low price can hide a company in decline: that is the value trap. A low percentile is only attractive if the quality score is there too. Hence my rule: quality first, price second, never the other way around.

Is a 10/10 score enough to buy?

No. An excellent company paid for at the top of its history can disappoint: quality does not protect you from a bad entry price. I always check the P/FCF and its percentile before acting. This is not personalized investment advice, do your own research.

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About the author

Written by Lubin Danilo, founder of Lubin Investment. A self-taught individual investor, I have analyzed stocks through their fundamentals for several years and invest my own money with this method. I codified it into a tool that judges a company's quality and its price separately, using criteria drawn from the financial literature (Warren Buffett, Michael Mauboussin, Aswath Damodaran).