Starting with quality, a key facet being competitive advantage; we cannot have confidence in a company’s ability to at least maintain its market share if it does not have an enduring competitive advantage. Companies with the most powerful competitive advantage typically combine scale with some form of ‘customer captivity’ (e.g. premium brand), which presents high competitive barriers to entry.
Growth must be considered, as share prices typically follow a company’s earnings growth over the long-term. There are many dimensions to growth: is the business exposed to structurally growing or cyclical end-markets? How much of its revenue growth comes organically (via reinvestment) or, from acquisitions? Can the business raise margins? And, what is its ‘runway potential’ in terms of penetration rates by products/services and by geography etc.? On valuation, we look at how shares trade on a relative basis versus peers and versus the company’s own historical multiples. Additionally, valuation needs to be considered on an absolute basis to assess intrinsic value.
There is no merit to owning a high quality business that isn’t growing. Equally, it’s unwise to hold a high growth company if it possess little quality - as competitive pressures will intensify. Even if a company meets our quality and growth criteria, its valuation can still be excessive, deterring investment. Therefore our holistic approach of assessing quality, growth and value is critical in providing a measured framework for stock analysis. The hard part comes in weighing it all up!