The Hermit Valuation Framework
Access the proprietary model we use to screen, value, and stress-test every position in the portfolio
Executive Summary
We are often asked how we translate qualitative research into a target price.
While judgment always supersedes spreadsheets, a disciplined quantitative framework is essential to avoid overpaying for quality.
Today, we are releasing the Hermit Valuation Model (v1.0).
This is not a generic template; it is the functional chassis of our investment process, stripped down for clarity but retaining the core engines we use at Equity Focus FIL.
What is inside the module:
The “Reverse-Engineering” Valuation Model: A streamlined DCF that focuses on earnings power and required returns.
The “Red Flag” Ratio Engine: A quick-test calculator to check financial health instantly.
The Qualitative Scorecard: The 360º checklist we use to vet management, moats, and capital allocation.
The Black-Scholes Model: A built-in derivatives pricer for hedging and option strategies.
1. The Philosophy: Judgment > Formulas
Most valuation models fail because they rely on false precision. They ask you to project revenue for the next 46 quarters down to the decimal. We reject that approach.
Our model is designed for “Roughly Right.”
It forces you to input the few variables that actually matter (Earnings Power, Growth Durability, and Capital Returns) and then tells you what price you must pay to achieve your hurdle rate (e.g., 15%).
2. How to Use The Model
The sheet is color-coded for simplicity. You only need to adjust the Blue Font Cells. Everything else is automated.
Key Inputs Explained:
Ticker/Sector: For your internal tracking.
Scenario Selection: We include three preset scenarios (Bear, Base, Bull). We default to “Intermediate” (Base) for initial screens.
Model Duration: Standard is 10 years. For high-velocity tech or cyclical compounders, adjust to 5 years.
Profitability Inputs (EPS): We use a 5-10 year average of EPS growth to smooth out volatility.
Share Count Dynamics:
Buybacks: Input a positive % (e.g., 2%) if the company creates value by retiring shares.
Dilution: Input a negative % (e.g., -3%) for serial diluters.
Required Rate of Return (Hurdle): This is your opportunity cost. At the fund, our hurdle is 15%. If the model can’t justify a purchase at 15%, we pass.
Margin of Safety: The discount to intrinsic value you require. Standard is 50%, but this scales with quality.
3. The Qualitative Scorecard
Numbers tell you what happened; the scorecard tells you why it will happen again.
Included in the file is our “Green Flag” Checklist. This is a safety net designed to minimize unforced errors. It covers:
Management Incentives: Is insider ownership >10%?
Capital Allocation: Do they have a history of accretive buybacks?
Moat Durability: Is pricing power structural or temporary?
4. The Options Module (Black-Scholes)
For advanced practitioners, we have included a brute-force Black-Scholes calculator. This allows you to price European Call/Put options to assess hedging costs or potential mispricing in the derivatives market.
Variables:
“S” (Stock Price): Current market price.
“K” (Strike Price): Execution price.
“r” (Risk-Free Rate): Typically the 10Y US Treasury yield.
“sigma” (Volatility): The annualized standard deviation (IV).
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Been using valuation models since before Excel existed. This forces you to slow down and think. In a market driven by instant gratification, that's worth its weight in gold.