Research Outline
Management must be aggressive, efficient, understand social trends and have the good will of its employees. Directors and officers should have a substantial stock ownership in their companies. Are salaries and pensions excessive?
Intelligent research which develops new markets, new products, or both is essential.
Is there a moat against future competition?
Finances must be strong enough to weather financial difficulties.
Return on invested capital must be reasonable.
Avoid regulated industries
Employees should be well paid, but the tota; payroll should be relatively low and easily adjusted to changes in business volume.
Defining precisely what we are trying to do.
Clearly understanding the reasons for the strategy
Recognizing in advance what problems will sooner or later accompany the strategy
Developing the strength to stay the course even during troubled times
Successful investing requires constant inquisitiveness about the new and everlasting, open-minded re-examination of the old.
We just concentrate on companies that have a clear prospect of very rapid increases in earnings per share over a protracted period of time. 40% growth in earnings for the next three to five years.
These companies:
ú Clear opportunity for large and rapid growth in its business.
ú Earn a very high return on invested capital. 30 to 50% each yr on the money they are using-after taxes.
ú A truly remarkable person or group in charge.
The generalist has an advantage over the specialist because the crucial question is always how the new technology will affect the way people lead their lives.
Is there integrity, dedication and intelligence from the top management to realize the potential of the business opportunity?.
The lowest priced growth opportunities are found in the most volatile industries.
Rapidly growing companies tend to be the smaller companies.
What is the risk reward potential?
There is no substitute for objectivity and persistence in the pursuit of truly insightful analyses.
Analyze:
Management capabilities of key executives through first hand observations of their management methods.
The company's markets and products as their customers and competitors view them.
Criteria for stock selection for emerging growth companies.
ú EPS growth rate of at least 20% over the next five years
ú High operating or pretax margins
ú High return on shareholder's equity so that as much growth is internally financed as possible
ú Clean balance sheet with little or no debt.
ú Conservative accounting practices.
ú Leadership position in the industry or market served.
ú Exceptional management to handle sustained, rapid growth.
ú Annual sales of $10 to $100 million.
How sustainable is the company's profitability.
The absolute level of profit must analyzed in the context of the company's industry and competition.
Companies with a growth rate of 25, 30% or more often cannot generate a high enough return on equity to finance all of the growth internally and must raise capital from external sources such as by selling more common stock. Companies can accumulate excess cash which can mask the underlying returns on the operations of the business. by subtracting the excess cash equivalents from shareholder's equity and deducting the related interest income from earnings, on can calculate the return on "operating" equity
To assess the trends in the basic business. while the ROE is important, so is the year to year trend, which can signal changes in the business.
The company must be number one or two in its niche. Buy the leader not the also ran even if more expensive.
The companies should be aggressive in marketing, research and expansion plans but conservative in their financial structure.
Make sure the company has the best sales, marketing and distribution. This is what creates and maintains a lead.
Management quality: note the turnover of key employees.
DOES ACTRADE FIT SOME OR ALL OF THE ABOVE CRITERIA? |
