Stock is not like a race horse. Offspring need not be like parents in business skills. Compare today’s Ford with the previous generation of Gates. A business Guru at the helm makes all the difference. However, investors rarely know until the stock has appreciated already. Do not lose hope though, you can spot winning stocks of tomorrow, by being aware of the following:
Branding is strong. It could be young people in jeans, a vague ethnic sub-group, or a branch of the medical community. You may not be a part of the target segment. That should not deter you from buying stock with strong brands in the stable.
Funding is stable. Total debt never exceeds equity. Stock is widely held except for a unified entity with long term interests in the relevant industry. Contingency credit lines are not at sub-prime rates. The Quick Ratio is comfortable.
Operations can weather a storm. Interest is a small fraction of projected net revenue. Structure is lean. Big ticket expenses can be scaled back quickly. Working Capital turnover is rapid, with conservative value reporting.
Management is low-key and transparent. Estimates are balanced. Downsides and assumptions are not given short shrift. Key centers of power have sound reasons to decrease their stock holdings.
The company splurges on recruitment, training, and team development. Process matters more than star performers. Diversity is not for form’s sake. Merit rules. Spring cleaning is regular and thorough.
Great companies are built on plans. They may remain in someone’s head. Documents are guarded tighter than cash. Only due diligence can uncover the truth of budgeting, strategic planning, and investment analysis inside the bowels of corporations. That is why Private Equity, banks, and acquiring competitors can value stock better than small guys. However, trained eyes can read the fine print in financial statements.
