6 worked examples

Why

• Business quality: Durable, understandable, cash-generative. Brand and global distribution are the assets; the question is whether volume growth, pricing, and mix can keep up with the dividend over a 5+ year horizon.
• Moat / risk: Moat is brand + global bottling relationships. Kill risk: structural shift in consumer behavior (e.g. a sustained move away from sugary drinks) hitting volume faster than pricing can offset.
• Valuation sanity: Has historically commanded a consumer-staples premium. Test the current price against (a) the company's own EV/EBITDA band, (b) FCF / earnings yield vs. long-term risk-free yield plus a clear risk premium, and (c) implied long-term volume growth and pricing power.

Check First (exactly 3)

1. Is KO's EV/EBITDA inside or outside its 10-year band?
2. Is the dividend yield still meaningfully above the long-term risk-free yield (with a risk premium absorbed), or is the income thesis fading?
3. What does today's price imply about long-term volume growth and pricing power?

Why

• Business quality: Durable, understandable, capital-light. Closed-loop network with a high-spend, high-fee customer base. Revenue is fee-driven (discount rate, net card fees, net services), and balance-sheet risk is materially lower than bank-card peers.
• Moat / risk: Moat is brand + closed-loop customer data + merchant acceptance in the premium segment. Kill risk: a credible competitor in the premium closed-loop space, or a sustained spend slowdown in the high-net-worth segment.
• Valuation sanity: Has historically traded at a premium for the capital-light model. Test the current price against (a) its own historical P/E and FCF yield band, (b) the spread between its earnings yield and the long-term risk-free yield plus a risk premium, and (c) implied billings growth and net card-fee growth.

Check First (exactly 3)

1. Where does AXP's forward P/E sit versus its 5- and 10-year average?
2. Is the FCF / earnings yield spread to the long-term risk-free rate still wide enough to compensate for credit-cycle exposure?
3. What does today's price imply about billings growth and net card-fee growth over the next 3-5 years?

Why

• Business quality: Understandable (personal-auto + commercial lines insurer) with a long public track record. Underwriting margin + float investment income are the two engines. Quality is visible in combined ratio stability across cycles.
• Moat / risk: Moat is direct-to-consumer brand + proprietary pricing model. Kill risk: a multi-quarter underwriting deterioration from adverse selection (e.g. the kind of mix shift that makes pricing look strong while loss picks miss).
• Valuation sanity: Historically trades at a reasonable P/E for a quality insurer; the test is whether the current price already assumes combined-ratio improvement. Verify against the company's own historical band and peer P/E, and the FCF-yield spread to the long-term risk-free rate plus risk premium.

Check First (exactly 3)

1. Is the current combined ratio inside Progressive's long-term target band, and is the trend improving or stable?
2. What does today's price imply about forward combined ratio and premium growth?
3. How is float yield trending vs. the long-term risk-free rate, and is the spread to risk-free + risk premium adequate?

Why

• Business quality: Durable, understandable, cash-generative. The thesis is services + installed-base monetization layered on top of a hardware refresh cycle. The business is best analyzed as a consumer franchise with a tech engine, not as a pure semiconductor / OS play.
• Moat / risk: Moat is the installed base + ecosystem lock-in (App Store, iMessage, services). Kill risk: regulatory action that breaks App Store economics (e.g. sideloading mandates with material fee impact), or a sustained slowdown in hardware upgrades.
• Valuation sanity: Forward P/E has trended higher as services mix has grown. Test against the company's own historical band, and the FCF / earnings yield spread to the long-term risk-free yield plus a risk premium. Implied services-growth assumption is the most sensitive input.

Check First (exactly 3)

1. Is AAPL's forward P/E inside or outside its 5-year band?
2. What does the latest services revenue mix say about the durability of the monetization story?
3. Is any active regulatory action (App Store, sideloading, payment rails) material to the services margin thesis?

Why

• Business quality: Durable, understandable, cash-generative membership-warehouse model. Margins are thin by design, but member-fee economics and inventory turns are the real engine. Single-line, single-currency exposure to US consumer spending.
• Moat / risk: Moat is the membership renewal rate + supplier trust, not the price gap. Kill risk: any event that meaningfully erodes renewal economics (e.g. a multi-year squeeze on real wages hitting the middle-class shopper).
• Valuation sanity: Has historically traded above the broader market for good reason, but the current multiple is again near the upper end of its 10-year range. The honest test: today's price already assumes a long tail of strong same-store growth and member-fee growth — heroic, not impossible, but the risk premium for getting it wrong is narrow.

Check First (exactly 3)

1. Is the current EV/EBITDA inside or outside Costco's 10-year band?
2. What FCF / earnings yield is the market demanding, and how wide is the spread to the long-term risk-free yield plus a risk premium?
3. What does today's price imply about forward comp growth and membership-fee growth?

Why

• Business quality: Understandable (accelerator silicon for AI training and inference) and a clearly durable position today. The risk is that the quality case is broadly agreed upon, which means the price already reflects a long tail of strong results.
• Moat / risk: Moat is the CUDA software stack + multi-generation process lead. Kill risk: a credible competitor ecosystem gaining real workloads, a hyperscaler pulling in-house silicon at scale, or a sudden end of the training capex cycle.
• Valuation sanity: Current multiple implies multi-year double-digit growth in data-center revenue at sustained margins. The FCF / earnings yield spread to the long-term risk-free yield plus a risk premium is narrow — the price is asking for near-perfect execution. Outside strict circle of competence for many investors.

Check First (exactly 3)

1. What forward growth rate is the current market cap actually pricing in, and is that rate plausible against hyperscaler capex commentary?
2. Is the FCF / earnings yield spread to the long-term risk-free yield + risk premium still wide enough to compensate for the cycle and competitive risk?
3. What evidence would actually change the thesis (e.g. a credible 2nd-source AI accelerator ecosystem, or hyperscaler capex flattening for 2 consecutive quarters)?