I’m going to consolidate a few ideas into this one section, because the main point is the same: focusing on the big picture. It’s too easy to get caught up in the quarter-to-quarter noise. It is imperative to rise above price volatility and short-term concerns.
This is a topic that’s been in the news this week. Donald Trump is correct when he says that investors are management teams are too focused on quarterly results. I’m not entirely sure, however, that moving from quarterly to semiannual reporting is the solution to this problem. You see, shifting our focus from an arbitrary three-month period to an arbitrary six-month period still really isn’t all that long-term. We want to think about years here… even, decades. If I’m buying a piece of a company, ideally, I want to own that company forever. That’s where the big money is made.
And so the goal is to look beyond short-term factors. No amount of government diktat will make us better investors. It’s up to you to ignore the noise. And the way to do this is to zoom out.
Where will long-term growth come from?
Are the big trends in your favour?
How will this company fare versus peers and competitors?
Is the revenue growth rate expected to accelerate or decelerate?
Is market share being gained, or lost?
Where is growth coming from?
If it’s organic growth, what’s the reinvestment runway? What are the ROIC trends?
If it’s growth by acquisitions, is there a pipeline of attractive targets?
What are the threats?
Previously, we looked at a company’s sustainable competitive advantages. Now we want to understand if the moat is growing, stable, or shrinking.
What are the key performance indicators we want to monitor that demonstrate that things are playing out the way we expect?
Do the actual numbers support your qualitative analysis? Pay close attention to margins, as they can indicate a healthy or struggling core business.
Evaluate capital intensity
Will significant capital expenditures be required to hit growth targets?
How will the future compare to the past? Is existing capital stock due for replacement, suggesting recent FCF may have been overstated?
What are management’s plans for returning capital to shareholders?
Finally… What can go wrong?
Brainstorm all of the potential threats to the company’s competitive position. Assign odds to these threats. Understand how they can impact the business. Monitor financial results for early indications of these risks playing out. Listen for relevant management comments.
This list is certainly incomplete. Feel free to add your own thoughts in the comments. What factors do you like to focus on when trying to form a picture of a company’s long-term prospects?
Past entries in this series
Part 8: The Industry Advantage
Thanks for reading!