Investment Criteria for identifying high-quality companies

A checklist and criteria analyzing every company featured!

METHODOLOGY EXPLAINED:

At Investing Analyst, we want to find the next great companies of the future. Companies that that are super growth compounders that will multiply shareholder returns over the next 2-5 years.

Below I highlight the key factors, criteria’s and checklist that we use to evaluate any investment to identify these future compounders. A company must score at least 75-80% of the criteria’s on this checklist as it will be difficult to find a company that checks every mark.

These factors are essentially for any company covered on this page:

1. Values-Driven/Personal:

   • Investing is personal and everyone has different perspectives of the world. It is important to ensure that the company we invest into supports those values. Does the company’s product bring about good in society?

2. Company Story/Product Value:

   • Does the company’s product add value to individuals or to other businesses? Are they perceived as essential or a substitute? We want essential businesses!

   • Is the business innovative, disrupting a large industry and investing for the long-term?

   • Company’s Competitive Advantage: Does the company have strong network effects; optionality with product launches + very high switching costs.

3. Company’s Future Growth Potential:

   • Past Growth: One of the most important criteria, has the company been growing consistently over the last 3-5 years? [This gives us evidence of the company’s execution and shows the company has a product that people desire]. We only want companies growing minimum of 30% YoY?

   • Future Growth: What is the future prospect and long-term growth (LTG) potential for the company based on professional analysts forecast?

   • Consensus Analyst Price Target: What is consensus Analyst target for the stock? Based on valuation, we want it to be higher.

4. Industry Trends:

   • The Industry/Total Addressable Market (TAM) for the product: Is this an industry growing over 15% YoY where there is a tremendous opportunity ahead? What is the TAM for the business moving forward? Do current trends in society support this industry tailwind?

5. Financial Analysis & Statements:

   • Very important - Is the top line revenue growing over 40% YoY over a 3-year period (CAGR)?

   • Income statement analysis - Gross Margins should be at least 50%, ideally are they above 70%? Are the operating and net margins over (15%)? We want companies that are rapidly increasing their margins.

   • Balanced sheet analysis – CA > CL over 2? TCA>TCL over 3? Manageable debt load with progress to paying down?

6. Company Valuation Metrics:

   • Evaluate the current stock valuation: Are the Price-Earnings Ratio <100; Price-Sales < 25 and P/B Ratios <40 (Note: These factors matter change based on the growth rate on the company. The highest the growth rate, the more I can accept high valuations and vice-versa)

   • Market Capitalization: Ideally we want less than <$15B-$40B – as this signifies the potential for the stock to grow exponentially

7. Management Team:

   • Evaluate the Management team – does the company have solid leaders with good credential + credibility within the industry? Company culture and Glassdoor Ratings over 4.0?

   • Significant Insider Ownership - Is this the Founder? how much ownership does the leadership team own? have the executives been buying their stock or selling over the last 6-months?

8. Technical Analysis:

   • What does the current momentum around the stock look like? Has it run-up too fast? Are there significant volume building into the stock like hedge-funds buying?

   • General momentum and trend analysis: Is it around a support or resistance level?

   • Evaluate the current stock price; Is this a good buy now or could I wait?

   These rules apply to managing Investments over time and general:

9. Portfolio Management & Risk Management:

   • Allocating a diversified portfolio of 10-15 stocks that cut across different industries and importantly, enhances the opportunity to reduce macro-economic factors and risks.

10. Behavioral Psychology & Emotional Management:

    • Patience - this is one of the most important virtues in Investing. Investors need to have the patience for their investment, and thesis to play out over the life-span of a company. Investors with significant returns have resist the temptation to sell stocks if their investment thesis hasn’t changed, despite if a company has a poor quarter.

    • Emotions - this is another under-rated skill for investors. Investors need to have the ability to manage their emotions and behaviour during moments when your investment are red and down over 20%. The same concept is true when you feel ecstatic when your portfolio is up. Multi-returns investors need to manage their emotions and let their investments do the hard-work.

Generally, these are the rules and disciplines that the Investi Analyst follows to ensure we find great companies of the future that will drive significant shareholder returns over the next 5-years. The process applies for every company analyzed on this page.

Thank you so much for reading. Let me know what other investment tips and advice that has helped you become successful. Subscribe to ensure that you don’t miss out on our companies of the future. Follow us on Twitter to get action.