Beansprout Stock Rating Framework

1. Understanding the Rating System

What does a star rating actually mean?

Our star rating reflects our overall conviction in a stock as an Opportunity Pot idea. It provides an indication of how much we will consider allocating to the stock within our Opportunity Pot model portfolio. 

Each rating maps to a specific position size range:

• 5 stars (Highest Conviction) — Position size: 15–25% of the Opportunity Pot.
• 4 stars (Strong Conviction) — Position size: 8–20% of the Opportunity Pot.
• 3 stars (Moderate Conviction) — Position size: 3–10% of the Opportunity Pot.
• 2 stars (Low conviction) — Begin reducing or exiting the position.
• 1 star (Avoid) — Exit the position entirely (0% allocation).

The rating is not just a view on the stock, but also a guide on how much exposure of the stock we have in our model portfolio.. When the rating changes, our position size would change with it.

How is this different from just picking stocks based on a hot theme or trending news?

A good story is not the same as a good investment. Our 3-factor screen specifically exists to slow us down before we get carried away by excitement. A stock can be in a hot industry like AI or data centres but still fail our checks — for example, it may be losing money, carrying too much debt, or generating poor returns on shareholders' capital. The framework forces us to ask whether the growth story is actually showing up in the numbers.

Learn how to identify better growth stocks with Beansprout's opportunity pot screening framework here. 

What are the 3 factors in the screening framework?

The three factors are: (1) Revenue & Earnings Momentum — we want to see revenue and earnings growing or clearly improving. (2) Balance Sheet Strength — we prefer net debt-to-equity below 1.0x, and treat above 1.5x as a warning sign. (3) Return on Equity (ROE) — we look for ROE above 8% to assess whether the business generates meaningful returns on shareholders' capital.

Learn how to identify better growth stocks with Beansprout's opportunity pot screening framework here. 

Do all 3 factors have equal weight?

We treat the factors holistically rather than mechanically. A stock generally needs to pass all three factors to move from our broad watchlist to deeper research. That said, context matters. A company that temporarily fails the balance sheet check because it just made a strategic acquisition is different from one that has been steadily overleveraging for years. We use judgement alongside the screen, not instead of it.

Learn how to identify better growth stocks with Beansprout's opportunity pot screening framework here. 

Can a stock have a high star rating but still go down in price?

Yes, absolutely. 

Our rating reflects the quality and trajectory of the business, not a prediction of short-term price movement. Markets can be irrational in the short term — a fundamentally strong company can see its share price fall due to broader market sell-offs, sector rotation, or temporary sentiment shifts. 

What the rating provides is an assessment that the underlying business remains sound, which is actually when long-term investors should stay calm rather than panic.

2. Understanding Target Prices

If a stock hits its target price, does that mean I should sell?

A target price is our best estimate of fair value at a point in time.

The more important question is whether the investment thesis has changed. If the company is still passing our 3-factor checks and the business fundamentals remain intact, there may still be a case for holding the stock. 

How do I know if the thesis has actually broken versus the stock just being temporarily weak?

A broken thesis means something fundamental has changed. For example, the company may be losing revenue to a new competitor, the balance sheet has deteriorated significantly, ROE has collapsed, or management has made a poor capital allocation decision. 

A temporarily weak stock might just be experiencing a sector-wide sell-off, a one-off quarterly miss, or short-term macro pressure while the core business remains intact. We monitor this closely and will flag clearly when we believe the thesis has changed, not just the price.

What triggers a target price review?

Several things can prompt a formal review, including quarterly earnings that meaningfully beat or miss expectations, a significant change in the company's growth outlook, balance sheet developments like a large acquisition or debt refinancing, or a material shift in the macro environment affecting the sector. 

What if the target price keeps getting revised upward? Isn't that just moving the goalposts?

It can feel that way, but there is an important distinction. If a company keeps beating earnings estimates and growing faster than expected, a higher fair value is mathematically justified — it reflects a better business, not wishful thinking. 

Where target revisions become a red flag is when they are not backed by improving fundamentals, such as when valuations are simply being stretched to justify a popular trade. We always anchor our target revisions to changes in the 3 factors and the underlying earnings trajectory.