At the end of the day, there is no single factor that assures me that a company is of high quality. I look at the whole picture, realizing that a company does not change much in a period of say two years during which, if I hold the stock, I might be trading it several times.
In the big picture, I am looking for the following:
· Steady rise and fall in the price motion of the common stock, which reflects sustainable periods of investor confidence
· No management scandals or major lawsuits
· A clean balance sheet that reflects no concerns over bankruptcy or inability to raise capital if needed
· Steady growth in company revenue
· Up-trending free cash flow growth
· Steady but small improvements to profit margin
· Earnings with up-trending earnings growth
· Relatively higher return on equity than peer group
· Relatively higher return on invested capital than peer group
· Dividend growth, if there are dividends, but dividends are unnecessary if capital has been used wisely
· A fairly low consensus rating by buy-side analysts
· Relatively low short-selling activity
I am not too concerned about debt ratios as long as interest rates are extremely low and not likely to rise to historic norms in the foreseeable future.
I am also not too concerned about book value as in the digital era there is a greater emphasis on intangible assets.
As investors in the equity market, our investment criteria are quite different from say Warren Buffett who is interested in buying control or large stakes in companies. We seek quality mostly to avoid surprises while we are trading the common stock.
More on this later. Just some thoughts as I was looking through hundreds of companies as I assemble a large watchlist.