The WP Score Methodology
A proprietary 100-point framework for evaluating public equities through the lens of capital preservation — not capital appreciation.
Philosophy
Every analysis at Moschovakis Capital answers one question before all others: how much can I lose? If the downside scenario destroys capital, no amount of upside compensates. The Wealth Preservation Score (WP Score) formalises this principle into a repeatable, transparent, and auditable system.
The framework targets a total return of inflation plus 4% — roughly 7% annualised at current rates, including dividends. That number represents the minimum threshold at which an equity position earns its place versus a high-yield savings account. Capital that fails to clear that bar belongs in cash.
The WP Score evaluates every equity across eight dimensions, grouped into three weighted pillars. The weighting reflects the hierarchy of concerns: preservation first, adequate returns second, business quality third.
WP Score = (Downside Protection × 45%) + (Return Adequacy × 30%) + (Quality × 25%)
The Three Pillars
Pillar 1: Downside Protection — 45% weight
This pillar carries the highest weight because it addresses the central mandate: do not lose money. The score starts at 50 (neutral) and adjusts up or down based on quantifiable factors. A company that preserved dividends through 2008 and 2020, carries low leverage, and shows a positive bear-case total return earns full marks. A company with negative free cash flow, a recent dividend cut, and a bear case implying a 25% drawdown loses points fast.
Pillar 2: Return Adequacy — 30% weight
Preservation without adequate return is a savings account. This pillar scores the base-case total return CAGR on a linear scale. A return above 12% scores 100. A return between 8% and 10% scores 70, clearing the hurdle with room. Anything below 6% scores 20 — the position does not compensate you for holding equity risk instead of cash.
Pillar 3: Quality — 25% weight
Quality captures four sub-dimensions that determine whether the business can sustain both its downside protection and its return profile over a full economic cycle. It is scored out of 100 points, distributed across the four dimensions below.
The Eight Dimensions
Balance Sheet Fortress
Measures solvency, leverage, and liquidity. Primary inputs: debt-to-equity (target below 0.5×, red flag above 1.0×), interest coverage (minimum 5.0×, preferred above 8.0×), current ratio (minimum 1.5×), and consecutive years of positive free cash flow (target 5 of 5).
The stress test is specific: if revenue drops 30% for two consecutive years, can the company remain solvent, maintain its dividend, and avoid a dilutive equity raise? Companies that pass all three earn a Fortress rating. Those that fail any one receive Marginal or Unacceptable.
Income Reliability
Scores current yield (sweet spot 2–4%), payout ratio (below 60% for growers, below 75% for mature businesses), FCF payout ratio (below 70%), five-year dividend growth rate (must exceed inflation), consecutive years of payment (prefer 10+), and FCF-to-dividend coverage (minimum 1.3×).
Companies that pay no dividend face a structural scoring penalty, since zero-dividend positions rely entirely on price appreciation — which introduces the volatility this framework penalises.
Capital Efficiency
Measures whether management generates returns above the cost of capital. The primary metric is ROIC versus WACC. An ROIC above 15% signals a durable competitive advantage. Between 10% and 15% indicates a good business operating above its cost of capital. Below 6% indicates value destruction and disqualifies the company regardless of other factors.
Trend matters as much as level. An improving ROIC earns full marks. A declining ROIC earns zero — it signals the competitive position is eroding.
Valuation Discipline
The framework does not require cheap stocks. It requires fair prices with a margin of safety. This dimension compares current P/E, EV/EBITDA, P/FCF, and dividend yield against their own five-year and ten-year historical averages.
Fair value is calculated by applying a normalised earnings base (five-year average margin on current revenue) to the historical average multiple. A 10% margin of safety is the minimum for a buy recommendation.
Downside Protection
Scored 0–100 starting from 50 neutral. Positive adjustments: bear-case total return above 0% (+15), debt-to-equity below 0.5× (+10), dividend maintained through both 2008 and 2020 (+10), maximum historical drawdown below 40% (+10), current yield above 3% (+5).
Negative adjustments: bear-case price decline exceeding 20% (−15), debt-to-equity above 1.0× (−10), negative free cash flow in any of the past five years (−10), dividend cut in the past decade (−10), payout ratio above 75% (−5).
Return Adequacy
Scores the base-case total return CAGR (price appreciation plus reinvested dividends, ten-year horizon). Scoring bands: above 12% → 100, 10–12% → 85, 8–10% → 70, 7–8% → 55, 6–7% → 40, below 6% → 20.
Total return is the sum of three components: dividend yield, expected earnings growth, and expected annual change in valuation multiple (mean reversion to historical average).
Competitive Moat
A qualitative assessment of the company’s ability to defend its market position over the next ten years. Moat types ranked by preservation value: regulated monopolies and high switching-cost businesses rank highest; brand power and cost advantages rank as good; network effects and patent-dependent businesses rank as variable.
The output is a moat durability rating (1–10) and a threat assessment (Low, Moderate, or Elevated). A company with an Elevated threat assessment requires a higher return hurdle to compensate for erosion risk.
Management & Governance
Evaluates the people allocating your capital. CEO tenure (prefer above 5 years), insider ownership (prefer above 2%), compensation structure (flag if CEO total comp exceeds 3% of net income), and a five-year capital allocation track record covering buyback timing, acquisition returns, dividend consistency, and debt management.
Red flags: frequent large acquisitions, buybacks at peak valuations, dividend cuts outside recessions, high executive turnover, related-party transactions, and aggressive accounting practices.
Decision Thresholds
| WP Score | Signal | Action |
|---|---|---|
| 75 or above | High conviction | Full position size |
| 65–74 | Buy candidate | Standard position size |
| 55–64 | Hold / Watchlist | Monitor for better entry |
| 45–54 | Marginal | Better alternatives likely exist |
| Below 45 | Avoid | Does not meet preservation standards |
Absolute disqualifiers override the score. A company that fails any one of five gate conditions is rated Avoid regardless of its composite number: (1) bear-case total return below 0%; (2) base-case total return below 7%; (3) solvency rated Marginal or Unacceptable; (4) dividend sustainability rated At Risk or Unsustainable; (5) probability of greater-than-50% permanent capital loss above 10%.
Scenario Analysis
Every report models three scenarios weighted 25/50/25 (bear/base/bull). The bear case assumes a recession, margin compression to historical lows, and multiple contraction to the ten-year trough. If the company pays a dividend with a payout ratio above 70% under stress, the bear case assumes a 25% dividend cut.
The probability-weighted expected return is: (25% × bear CAGR) + (50% × base CAGR) + (25% × bull CAGR). If that number falls below 7%, the position does not earn its place in the portfolio.
Framework Adaptations
Certain business structures require modified inputs. Banks substitute CET1 ratio, non-performing loan ratio, and return on tangible equity for standard leverage and profitability metrics. REITs use loan-to-value, NAV discount, and recurrent earnings multiples. Growth companies with no dividend history waive the income reliability penalty but face a higher return hurdle, substituting free cash flow trajectory for dividend coverage.
For companies domiciled in jurisdictions with elevated structural risk — such as VIE structures in China — the framework applies a higher probability-of-permanent-loss threshold in bear-case construction.
Disclaimer
The WP Score is a proprietary analytical framework developed by Moschovakis Capital for internal research purposes. It does not constitute investment advice, a recommendation, or a solicitation to buy or sell any security. Past performance of any methodology does not guarantee future results. All investment decisions carry risk, including the potential loss of principal.