Portfolio on Fundamentals
Best-of-breed companies produce long-term performance records that are in many cases multiples of the general stock market produces. I don’t believe in investing in average companies. I believe in investing in above-average companies. I choose only to research, analyze and invest in what I consider to be the SRONGEST & BEST!
There is a parallelism between investing and sports. You want to acquire the best possible team for the game and likewise, intelligent investor knows that goal is to find the best companies.
“It is a funny thing about life; if you refuse to accept anything but the best, you often get it.”
– W. Somerset Maugham
My definition of a good company and stock is straightforward whose business is consistently growing sales, earnings and cash-flow at a significantly above-average rate. In other words, a growth stock is a company whose sales and earnings are consistently increasing at a minimum rate of change of 15% or better. However, a hyper growth company is one that I define as growing earnings at a rate of change 25% or better. Admittedly, there are more 15% growers than there are companies growing earnings at 25% or higher. In between these broader gradations of growth are additional growth categories such as a high grower at 20% etc.
Throughout the history, stock prices have gravitated around the ‘fundamentals’ of the underlying companies – namely ‘earnings’. The time-worn correlation between the market and corporate earnings has remained unchanged at around 70%. If you try to understand the forces that drive the stock market – for single stocks, sales and earnings are much more significant than any economic data release.
Management has two jobs
- Make a profit % of pre-Tax Profit on Sales
- Use that profit to grow future sales and earnings % Earned on Equits
Quality Growth Companies
- Have Great fundamentals
- Have good management that will consistently grow sales and earnings
I try to identify growing companies that I could feel comfortable investing. My criteria are rather simple and straightforward. I look for companies that have shown a consistent sales/earnings growth of 10-20% with maintaining/improving net margins and ROE for a minimum of 5 years [preferably 10 years]. Stated more simply, I want companies that have already demonstrated a reasonable level of success in whatever business they operate. I clearly understand that I cannot buy the past and that I am required to invest in the future. I believe there is a great deal to learn from the past. My true objective is to determine whether or not the company continues to possess the quality characteristics that enabled it to produce excellent historical results in the future.
Past is usually a good guide to the future.
As in sports:
You want to have best athlete in your team on past performance
While it may be backward looking but it can serve as an important gauge of the athlete.
“I have no use whatsoever for projections or forecasts. They create an illusion of apparent precision. The more meticulous they are, the more concerned you should be. We never look at projections, but we care very much about, and look very deeply at, track records. If a company has a lousy track record, but a very bright future, we will miss the opportunity.”- Warren Buffett
I believe we should learn as much as we can from the past, carefully focus on the present valuation and finally we must attempt to make rational and reasonable trajectory that we expect in future.