How to Spot a 10x Stock by Reading One Line in an Earnings Call

April 07, 2025

Hello Investor,

If you want to invest like a hedge fund pro, you can’t just look at earnings per share or analyst ratings—you need to study how capital is allocated inside a business.

Because behind every great stock story is a CEO who knew exactly where to put the next dollar.

What Is Capital Allocation—and Why Should You Care?

At its core, capital allocation is how a CEO decides to spend a company’s cash. The options sound simple:

  • Reinvest in the business (R&D, new stores, hiring engineers)

  • Acquire other companies

  • Pay down debt

  • Buy back stock

  • Pay dividends

But how and when a CEO chooses among these is often the difference between a 10% return and a 10-bagger.

Great capital allocation doesn’t just protect value—it compounds it.

Buffett’s Playbook: “CEOs Are Investors, Not Operators”

Warren Buffett famously said that the CEO's most important job is being a rational allocator of capital—not a product expert or marketer.

Here’s what that means in practice:

Allocation Move

When It’s Smart

When It’s Dumb

🔄 Buybacks

When shares are undervalued

When done to goose EPS

🧪 R&D / CapEx

When ROIC > Cost of Capital

When done blindly in weak segments

🛍 M&A

When it strengthens the moat

When it’s empire-building

💸 Dividends

When growth opportunities are limited

When it starves growth

Most CEOs won't say outright what their priorities are—but their earnings reports will.

What to Look For in Earnings & Presentations

You can spot great capital allocation by reading between the lines of a 10-K or investor deck. Here's where to focus:

1. ROI-Focused Language

“We’re targeting high-IRR investments in our oncology pipeline.”
This shows discipline. CEOs thinking like investors talk about return on invested capital (ROIC), internal rate of return (IRR), and payback periods.

2. Shareholder-First Mentality

“We reduced shares outstanding by 4% while maintaining liquidity.”
Smart buybacks are surgical. Look for reductions in share count during periods of undervaluation, not during market peaks.

3. M&A with Synergy—and Restraint

“We’re acquiring to fill product gaps, not to chase revenue.”
Did the company pay a reasonable multiple? Are there clear cost or product synergies? If they’re vague on this, beware.

4. Strategic CapEx & R&D

“We’re prioritizing CapEx in automation to improve margins over time.”
CapEx isn’t always a red flag. The key is whether it’s driving productivity or building defensible advantages.

Pro Tip: Use ChatGPT to Accelerate Your Analysis

Want to see how capital allocation has evolved over the last five years?

Ask ChatGPT to:

  • Summarize historical CapEx trends from 10-Ks

  • Compare share repurchase history with stock price movements

  • Extract quotes from CEO letters on capital priorities

  • Benchmark capital allocation strategy against sector peers

📎 Try prompting:

“Summarize how LLY has allocated capital over the past 5 years based on 10-Ks and earnings transcripts.”

You’ll be amazed at what a few smart queries can uncover.

Bottom Line: Follow the Capital, Not the Headlines

Great CEOs don’t chase narratives—they compound capital with precision.

Study where the money’s going, and you’ll often find tomorrow’s outperformers before the market does.

Stay sharp, stay curious, and invest with purpose.

Best regards,
StocksTrades.AI Newsletter

Disclaimer: This newsletter is for informational purposes only and does not constitute financial advice. Always conduct your own research before making investment decisions.