My Investment Philosophy
I prefer small quoted companies to large ones. Mammoth companies rarely double their market capitalisation in a year. In contrast, small companies often do this and more. That is why I coined the expression ‘Elephants don’t gallop.’
To find a cheap growth share that is likely to benefit from a re-rating, investors should look for shares with a low PEG (price-to-earnings growth factor). This is the forecast PE (price-to-earnings) ratio divided by the forecast future growth rate. A PEG of under one usually indicates an attractive stock.
To be sure that the forecast growth rate is firmly backed it is advisable to ensure that the company has at least four years of successive earnings per share growth, whether they be past or future or a combination of the two. Usually there will be three years past growth and one years forecast growth. Be wary of companies with exceptional growth of over say 30% in the coming year as they are likely to find such a high rate difficult to sustain.
It is also essential to make sure that the company is not over-geared and has strong cash flow in excess of earnings per share.
Also keep a firm eye on the relative performance of the share in question when compared with the market and its sector. If the shares are falling for no apparent reason someone out there may know something that would be bad news for you. In this context, watch directors’ dealings. A cluster of directors buying or selling usually points the way up or down for the future price action of the shares.
It is always difficult to determine when to sell. This is one of the most frequently asked questions. Click on the following link to see my advice on this: When to Sell.
In my opinion the best way of finding attractive shares is Company REFS. The black moons against each key statistic show how it compares with the market and the sector to highlight attractive growth and value stocks. The chart gives you price history, relative strength and the earnings outlook. A cluster of black moons and an attractive chart are a very visual easy indicator of exceptional value. In addition, the tables give a wealth of statistics ranking shares that are peforming best against the market, those that have the strongest future growth rates and those with the highest returns on capital employed and most attractive price-to-cash flows. Brokers’ forecasts changes offer an early indicator of good or bad news as do the detailed schedules of directors’ dealings and companies buying in their shares.