An important part of our investment discipline is knowing what to look for as we scour the globe for great investment opportunities. In researching both “growth” and “value” stocks there are certain company characteristics that we have found to be good predictors in long-term success time after time. We dig deep to understand each investment across critical characteristics in both growth and value investing.
We are looking for the World’s Best Growth Companies (WBGC)™ These companies share the following characteristics:
- Quality—superior business model with strong financials
- Superior Management—experienced, passionate, proven management teams, with skin in the game
- Sustainable Competitive Advantage—protection for their superior business model
- Room to Grow—clear opportunity for significant and sustained revenue and earnings growth
Drilling a level deeper, we also look for the following traits in great growth companies:
- Potential for expanding operating margins
- High return on capital and assets
- Market leadership and/or growing market share
- Barriers to competitive entry
- Ability to capitalize on favorable long-term trends
- Substantial insider ownership
Once we have found one of the World’s Best Growth Companies, valuation is an important element of our investment decision. With our core belief that earnings growth drive stock prices, we expect to capture price appreciation comparable to earnings growth as long as the price/earnings multiple is reasonable at the time of purchase. As a rough rule of thumb we like the P/E to be around our projected earnings growth rate. If the valuation is higher than this we will put the company on our watch list and look for opportune times to purchase.
Wasatch value investments are stocks trading at a price below their intrinsic values due to one of the following situations:
Fallen Angel — a great growth company that has hit a temporary setback, causing an appealing valuation relative to its long-term growth potential. We are looking for the same characteristics in these companies as outlined under our growth investing discipline. In fact, our “growth” team members are key contributors in helping us identify these companies.
Hidden Gem — a growing company that is undervalued because it has yet to be broadly discovered by Wall Street. Here again we are looking for the same characteristics as outlined under our growth investing discipline. These companies are likely to be held in both our value and growth portfolios.
Value Momentum — a more traditional “value” company, these stocks are trading at a very low value relative to their history. We purchase such companies once we can identify a clear catalyst for growth.
Hidden Value — a quality firm with assets or earnings potential not fully reflected in their stock price. These are generally more complicated situations where we believe the market is challenged in understanding the true value. We invest in these companies when we anticipate that an event is likely to occur that will help illuminate the true value.
Special Situation — a recent spin-off, a post-bankruptcy firm or company currently undergoing financial restructuring. These too are often more complicated situations which some investors have trouble valuing. We will invest here when our 3-5 year projections for the firm show a compelling opportunity.
Seeking out superior management
One consistent element we look for across all of these different types of value stocks is superior management. This harkens back to our core belief that the company’s business plan is only as good as its management team. In each of these value situations our investment success is dependent on the management team delivering on their business plan.