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What is Systematic Idea Generation?

Idea generation is the process of systematically identifying new investment opportunities — stocks to buy (long ideas) or sell short (short ideas). Rather than relying on tips, news headlines, or gut instinct, professional investors use structured approaches: quantitative screens that filter stocks by financial metrics, thematic sweeps that identify beneficiaries of macro trends, and pattern recognition based on historical situations that have generated returns. At quantitative hedge funds like Renaissance Technologies, D.E. Shaw, and Two Sigma, idea generation is entirely systematic — algorithms scan thousands of securities for statistical patterns. At fundamental firms like Viking Global, Coatue, or Pershing Square, the process blends quantitative screening with deep qualitative research. The common thread is discipline: a repeatable process that consistently surfaces ideas rather than waiting for inspiration. The most important thing to understand about screening is that it surfaces candidates, not conclusions. A stock that passes a value screen (low P/E, high free cash flow yield) might be cheap for a good reason (declining business, regulatory risk, poor management). The screen is the starting point; fundamental analysis determines whether it is truly an opportunity.

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Why It Matters

  • Breadth: There are ~4,000 publicly traded stocks in the US alone and ~40,000 globally. No analyst can follow them all. Screens let you cast a wide net efficiently
  • Discipline: A systematic process prevents the common pitfall of only looking at stocks that are already in the news or already popular
  • Contrarian ideas: The best investments are often in stocks that are out of favor, unloved, or overlooked. Screens can surface these before they show up on anyone’s radar
  • Track record: Documenting your screening process and tracking hit rates over time lets you learn which approaches generate the best ideas

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Key Concepts

TermDefinition
P/E RatioPrice-to-Earnings — stock price divided by earnings per share. Lower means “cheaper” relative to earnings
EV/EBITDAEnterprise Value to EBITDA — a valuation metric that accounts for debt. Preferred over P/E for highly leveraged companies
FCF YieldFree Cash Flow Yield — free cash flow divided by market cap. Measures how much cash the business generates relative to its price
Revenue GrowthYear-over-year change in revenue. A key measure of business momentum
ROICReturn on Invested Capital — measures how efficiently a company uses capital. High ROIC (>15%) indicates a strong business
Net RetentionFor SaaS companies, measures revenue growth from existing customers. Above 110% means customers are spending more over time
Short InterestPercentage of shares that are sold short. High short interest can indicate bearish sentiment or set up a squeeze
Insider BuyingWhen company executives buy stock with their own money. Often a bullish signal

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How It Works

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Step 1: Define Search Criteria

Specify direction (long/short/both), market cap range, sector focus, investment style (value/growth/quality/special situation), geography, and any thematic angle (AI, reshoring, aging demographics).
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Step 2: Run Quantitative Screens

Apply the selected screen type with specific metric filters. Each style has different criteria — value screens focus on low multiples and cash flow; growth screens focus on revenue acceleration and margin expansion; quality screens combine profitability, consistency, and management alignment.
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Step 3: Apply Thematic Overlay (if applicable)

For thematic ideas: define the thesis, map the value chain, identify pure-play vs. diversified exposure, assess which names are already “priced in” vs. under-appreciated, and look for second-order beneficiaries the market has not connected to the theme.
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Step 4: Present Each Idea

For each idea that passes the screen, provide a one-page summary with company name, direction, one-line thesis, key financial metrics vs. peers, 3-5 bullet thesis, key risks, and suggested next steps (build model, deep-dive diligence, expert call).
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Step 5: Deliver Shortlist

Produce a shortlist of 5-10 ideas with one-page summaries, screening methodology documentation, a comparison table, and a prioritized list of which ideas to research first.

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Screen Types

  • P/E below sector median
  • EV/EBITDA below historical average
  • Free cash flow yield >5%
  • Price/book below 1.5x
  • Insider buying in last 90 days
  • Dividend yield above market average
  • Revenue growth >15% YoY
  • Earnings growth >20% YoY
  • Revenue acceleration (growth rate increasing)
  • Expanding margins
  • High return on invested capital (>15%)
  • Strong net retention (>110% for SaaS)
  • Consistent revenue growth (5+ years)
  • Stable or expanding margins
  • ROE >15%
  • Low debt/equity
  • High free cash flow conversion
  • Insider ownership >5%
  • Declining revenue or decelerating growth
  • Margin compression
  • Rising receivables / inventory vs. sales
  • Insider selling
  • Valuation premium to peers without justification
  • High short interest with deteriorating fundamentals
  • Accounting red flags (auditor changes, restatements)
  • Recent IPOs / SPACs with lockup expirations
  • Spin-offs in last 12 months
  • Companies emerging from restructuring
  • Activist involvement
  • Management changes at underperforming companies

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How to Add to Your Local Context

# Install the plugin
claude plugin install equity-research@financial-services-plugins
Customizing screens: To add proprietary screening factors or modify thresholds, edit the skill file: 
open ~/.claude/skills/equity-research/idea-generation.md
Connecting to financial data APIs: 
{
  "mcpServers": {
    "financial-data": {
      "command": "financial-data-mcp",
      "args": ["--provider", "factset", "--api-key", "YOUR_KEY"]
    }
  }
}

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Best Practices

  • Avoid crowded trades: Check ownership data, short interest, and analyst coverage count. If every hedge fund already owns it, the upside may be limited
  • Contrarian ideas need a catalyst: Being early without a catalyst is the same as being wrong. Identify what will cause the market to re-rate the stock
  • Short ideas need higher conviction: Timing is harder and risk is asymmetric (unlimited loss potential). Require a stronger thesis and a clearer catalyst for shorts
  • Look for intersections: The best ideas often sit at the crossroads of multiple screens (e.g., a quality company trading at value prices due to a temporary headwind)
  • Track hit rates: Which screens and approaches produce the best ideas? This meta-analysis improves your process over time
  • Do not fall in love with screens: A screen that worked in the past may not work in the future. Markets adapt and factors rotate