The House Method, in brief
Every company we publish on is run through both legs of the House Method — always
both, no exemptions. Leg A asks how cheaply the market prices a company's quality
growth. Leg B asks what the company's cash flows are actually worth. A name earns
high conviction only when both legs agree.
Normalized gross profit
Margins lie at the top of a cycle. A company earning record gross margins at peak
demand looks cheap on almost any measure — right up until the cycle turns. We
value the margin a business earns across a cycle, not at its best moment:
forward expectations tempered by what the company has actually earned over the
years behind it. A structural improvement that shows up in both the history and
the outlook still counts — a one-off peak does not.
Why it matters: most "cheap" traps in growth stocks are margin traps. Normalizing
the margin is what separates a genuinely underpriced compounder from a cyclical
at the top of its earnings power.
Quality growth
Growth is easy to buy and hard to fund. We only credit growth that cash flow can
pay for. A company expanding revenue while its operations generate real cash is
compounding; a company expanding on borrowed money and dilution is spending —
and the bill eventually arrives in the share count.
Why it matters: the market routinely prices both kinds of growth the same. Our
quality-growth measure weighs how fast a company is growing against the cash it
produces while growing, so fast-and-funded scores — and fast-and-burning doesn't.
Durability
Some earnings streams are built to last. Others are one product, one customer, or
one pending decision from gone. We score the difference. Market position, revenue
that is contracted or recurring, balance-sheet strength, and whether margins held
up the last time conditions turned all feed the assessment — and fragility counts
against a company, not just for it.
Why it matters: two companies with identical growth can deserve very different
prices. Durability is our answer to the question a growth rate can't ask — how
much of this is still here in five years?
Margin of safety
The second leg ignores the first entirely. We build an independent valuation from
the company's own cash flows — what the business itself generates, projected and
discounted on stated assumptions — and compare it with the market price. When the
price sits well below that value, there is a cushion for being wrong.
Why it matters: no cushion, no conviction — however good the story. And when a
company produces no cash flow, the honest output is that this leg cannot value
it, not that it is worthless.
“The function of the margin of safety is, in essence, that of rendering unnecessary an accurate estimate of the future.”
— Benjamin Graham, The Intelligent Investor
“Price is what you pay. Value is what you get.”
— Warren Buffett
Graham named the principle for the industrial age. Our systems rebuild it for
modern markets — margins normalized for companies whose peak years distort the
average, durability scored for moats made of software and networks, and the
safety check integrated with a second, independent leg, so no single number ever
carries a verdict on its own.
How the legs combine: every company gets a verdict from how the
two legs land — never a blended composite score, and never one leg carrying the
conclusion alone. BEST — both legs make the case: quality growth
priced cheaply, with a margin of safety underneath it. WATCH — the
business is quality, but the price isn't there yet. INVESTIGATE —
the cash flows say cheap while the engine underneath is in question; worth a harder
look, not a quick yes. AVOID — neither leg makes the case. We
publish the disagreements, not just the agreements. The exact scoring — the
weights, the thresholds, the tiers — is the proprietary work our publications
exist to deliver.
Lineage, stated plainly: the relative leg is an EV/Gross-Profit
method in the PEG tradition, rebuilt with mid-cycle normalization, a quality-growth
term, and a durability rubric. The absolute leg is a standard two-stage DCF. The
method is ours in its rules, normalization, and disclosure — not in pretending the
underlying math was invented here.
The full scoring runs inside the Brief
This page shows what we measure and why it matters. The scoring itself — how the
measures are weighted, where the lines are drawn, and what verdict comes out — is
the work subscribers pay for, and it stays inside the publications. Every issue of
the Brief runs one company through both legs of the House Method and prints the
verdict with the inputs behind it, traced to the filings, so you can check every
fact for yourself. The free edition carries one full evaluation a week.
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