Stock Selection - According to the Wizard
Selecting Quality via stable long-term profitability
Quality in a stock is not Growth and it's not Value. Precisely what it is, is stability, i.e., investors believing that (i) the corporation is always going to be around because of its value proposition to customers, (ii) the dividends will always be paid, and (iii) the stock will be fully valued by shareholders who respect management and what they are doing for the corporation. So, finding quality requires personal judgment, largely based on prudence. Determining a prudent Price to Earnings multiple for a Quality stock is one of the toughest jobs investors will have...
Selecting Quality via independent research
Investors who seek peace of mind can start by looking at a corporation's quality rating by independent research services such as Standard & Poor's and Wright's. S & P has a simple seven-point rating classification: A+ (highest), A (high), A- (above average), B+ (average), B (below average), B- (lower), and C (lowest). Unless there is a special reason to do it, never invest in common shares of any corporation rated below B+. Clearly, quality is easiest to find among the larger cap stocks that are industry leaders, but you can also find it in the small cap corporations...
Selecting Growth using guidelines for professionals
In a search for growth company candidates for investment, professional money managers are guided by standards. Here are some standards developed by Wright Investors' Service. Unless you have other reasons, these should be the absolute minimums for listing a company on your Approved List: (1) Earned growth rate (unadjusted earnings growth rate per share): +4%, (2) Stability index: 60%, (3) Equity growth (annual rate per share): +4%, (4) Dividend growth (per share): +4%, and (5) Sales/revenues: +4%. True investment growth doesn't have to be on a rocket trajectory...
Differentiating Growth from price
Investing for growth is wise as long as the price you pay is reasonable. The problems develop because of Wall Street's tendency to swing from unsupported optimism to equally false pessimism. In the long run, corporate growth will determine the value of a stock; whereas for the short term, there may be very little relationship between price and value. At end of August 2003 IBM was 82.50 and two weeks later 92.50. In mid-September you couldn't call IBM a growth stock because it's price was up over 12% in two weeks. A week after that it was back down again $8...
Finding Growth stocks
In theory, the ideal growth stock is a proven growth company, in a proven growth industry, with proven, competent management and promising prospects for continued growth in the next decade. Its executives will be alert to new developments, and if they're not creating new products and markets, they will be moving their current ones into growth areas. In searching for growth stocks, you have to start at the beginning. A true growth stock must meet a broad spectrum of requirements beyond the obvious ones, such as an increase in (i) earnings, (ii) equity and (iii) dividends...
Seeking Growth in mature companies
Corporations do not have to be youthful to have growth potential. There are opportunities with mature companies where there's new management, a turnaround situation, or R&D-based developments. Reminds me of the story of the young bull who said to the old one, "Let's rush down to the herd and get ourselves a cow". The old one replied, "No, let's take our time and get them all." Well, the professional investor community finds a lot of highly seasoned corporations that still meet all the high standards for "growth" companies. Like General Electric and Intel for instance...
Finding Growth in unseasoned companies
Typically, you will find tomorrow's growth stock winners in today's unseasoned companies. But, while there may not be much of a track record yet, there are clues to look for. The domain of the speculative investor is the micro-cap company, i.e., those companies that have a market capitalization below $100 million and have been in existence fewer than ten years and listed on the stock market fewer than five. Look at the performance of the Russell 2000 small cap stocks in the 8 months from early March to November 7, 2003 - up 58.3% vs 33.5% for the S&P 500 large cap stocks...
Using mathematics to find Value
When seeking value, detailed financial analysis involves careful evaluation of figures for income, costs and expenses and earnings. But, more than the dollar amounts, it is important to study ratios and trends, both within the corporation and in comparison with those of other companies in the same industry. An absolute dollar amount can only tell you so much information. Usually, analysts prefer to use five- or ten-year averages. These can reveal significant changes and, on occasion, help the analyst spot special values in either concealed or inconspicuous assets...
