Reading time: 9-10 minutes
The 10B model I presented a few days ago looks for small, high-growth companies with the potential to grow tenfold in the long term. The Hidden Quality Radar (HQR) takes a different, complementary approach. While the 10B model targets early, dynamic scaling phases, the HQR focuses on companies with proven operational strength, a high return on capital and a stable balance sheet that have so far been underestimated or overlooked by the market. The aim is to identify quality before it is reflected in the share price - in other words, those companies that are not loud but consistently create value. The HQR thus stands for a down-to-earth approach to investing: less momentum, more substance.
The evaluation model again comprises five dimensions with a total of 100 points:
1. profitability & return on capital (0-20 points) - operating margin, ROIC, free cash flow ratio
2. balance sheet quality & debt (0-15 points) - equity ratio, net cash, working capital efficiency
3. growth & resilience (0-15 points) - organic sales growth, rule of 40, cyclical tolerance
4. management & capital allocation (0-10 points) - investment discipline, buybacks, dividend policy
5. market observance & valuation (0-40 points) - analyst coverage, trading volume, institutional ownership, valuation multiples in peer comparison
The higher the operational quality and the lower the market attention, the stronger the signal. The model thus combines substance analysis with a perception gap - and shows where quality is present but not yet priced by the market. Similar to the 10B model, I use ChatGPT for screening and initial analysis. Potential candidates are identified on the basis of fundamental key figures, margin development and balance sheet strength, which are then analyzed manually in greater depth - with a focus on the business model, capital allocation and structural competitive advantages. The process is therefore data-driven, but deliberately not automated: Each share undergoes a qualitative assessment before it is included in the model.
Below are three current examples that illustrate the approach of the HQR model.
$EKT (-8.55%)
Energiekontor - 87 points (in the portfolio)
Profitability & return on capital (19/20): Energiekontor generates a double-digit operating margin and achieves returns on capital employed in excess of 15%. The integrated business model - from project development to the company's own portfolio - ensures stable cash flows regardless of short-term electricity price movements. Capital turnover is efficient and the return on capital is consistently high.
Balance sheet quality & debt (14/15): The balance sheet is conservatively structured, with a high equity ratio and manageable leverage. Debt remains sustainable even if interest rates rise, and new projects are generally financed without dilution for shareholders.
Growth & resilience (15/15): The company has a solid project pipeline in Germany, the UK and Portugal. The Rule of 40 is regularly above 40%, which underlines the combination of growth and profitability. The business model is largely independent of short-term market cycles and shows that stability and expansion need not be a contradiction in terms.
Management & capital allocation (9/10): The management pursues a long-term, value-oriented strategy with a consistent focus on own holdings and steadily increasing dividends. Capital is only deployed where sustainable returns are possible - a rarity in the renewable energy sector.
Market observation & valuation (30/40): Despite convincing fundamentals, the share is barely represented in international portfolios. Analyst coverage remains low, trading volume moderate. Valuation ratios remain below those of comparable European developers. Energiekontor is therefore a prime example of a high-quality but underestimated stock.
$RMD (-2.58%)
ResMed - 82 points (on the watchlist)
Profitability & return on capital (18/20): ResMed has been generating operating margins above 25% with high free cash flow conversion for years. The business model is capital-light and scaling is high - a combination that enables above-average returns on capital in the long term.
Balance sheet quality & debt (13/15): The company has a solid balance sheet structure, with sufficient liquidity and a moderate level of debt. This allows the company to invest heavily in research and digitalization without having to rely on external funding.
Growth & resilience (14/15): Demand in the area of sleep apnoea is growing structurally, while ResMed is systematically expanding its cloud and monitoring platform. Sales growth remains stable in the high single-digit range and the Rule of 40 is around 45 %. Temporary market fears surrounding GLP-1 drugs have not changed the quality of the business.
Management & capital allocation (9/10): The management acts long-term, focused and with clear priorities. Capital is deployed efficiently, acquisitions are targeted and made from a position of strength.
Market observation & valuation (28/40): Despite global market leadership, ResMed is underrepresented in many portfolios. Valuation multiples are significantly below the large US medtech stocks, although margin and cash flow quality are comparable. The market is currently ignoring the structural strength - a typical HQR case.
$KID (-4%)
Kid ASA - 80 points (on the watchlist)
Profitability & Return on Capital (17/20): Kid ASA is the leading supplier of home textiles, interior design and household goods in Scandinavia. The company achieves stable operating margins of between 13% and 15% and has a free cash flow ratio of over 80%. The own-brand ratio is high, which ensures pricing power and stable gross margins.
Balance sheet quality & debt (13/15): The balance sheet is solid, the gearing ratio is moderate and the equity ratio is comfortable. Thanks to the high cash flow, investments and dividends are financed entirely from current funds.
Growth & Resilience (13/15): Kid is growing steadily, driven by store expansion, e-commerce and market share gains in the premium segment. The company remains profitable even in weaker consumer phases - proof of the pricing power and loyalty of its customers. The Rule of 40 is regularly above 40%.
Management & capital allocation (9/10): The management acts in a long-term and disciplined manner, combining growth with continuous dividend increases. Capital allocation is conservative and growth-oriented at the same time - a balance that strengthens the stability of the business model.
Market Observation & Valuation (28/40): Despite a strong market position, Kid is hardly noticed outside Scandinavia. Analyst coverage is limited, institutional ownership is low. The valuation level is below international retail stocks of comparable quality. Kid thus fulfills all HQR criteria: high operating strength, reliable cash flow, low visibility.
The 10B model looks for dynamism, the HQR for substance. While one focuses on early growth phases with higher risk, the other concentrates on consistent value creation and capital discipline. Both models complement each other: the 10B model provides the accelerators, the HQR the foundations. Especially in an environment where market sentiment and narratives change in ever shorter cycles, it is crucial to understand both - when risk is rewarded and when consistency brings returns.
Which strategy convinces you more in the long term - growth through scaling or returns through quality? And which companies would you currently put on the HQR radar yourself?
