What are the signs of a good company that may turn great? I look for Flywheel Effect. Imagine you have to start your own company. There are many foundation work needed to get started. From initial investment to hiring right people, then solving the right problem for the right people. We will get into in more detail later on.
What I found amazing in the stock markets is that there are companies who already are about reach Flywheel Effect. Instead of starting up on my own, I need to identify which companies they are so that I can invest on time.
While it is in not easy to find signs of a good company that may turn great, a few charactaristics I look are as below:
Well Prepared CEO
You can call this a superstition but I like companies which have well groomed CEOs. Not by looks or fame. I look for CEOs who have been prepared by the company for a while. While CEOs of fame can do the job. It is the quiet ones that impress me the most.
Growth History
May not always, but history helps understand a companies capability. If a company has been consistently show no growth for the past 6 months to 1 year, I’d look somewhere else. I know some companies do well after that. However, there are 99 other stocks I can pick from, why invest in one that has lower chances of success?
Growth Forecast & Valuation
I am not an expert in forecasting and setting price targets. There are experts out there who are ready to do that. I can’t beat their experience of 20-30 years. I’d rather check for 5 analyst growth forecast and look for at least 2 very positive growth forecast and valuation. I look for companies who Analysts think are seriously undervalues; at least by 50%. E.g. in case the price target is $10, I will only invest if the actual price is at $5. I know it is harsh and conservative, but it is going to money invested for a while. I better make it count.
Discipline
Best companies are the ones who expect the worst even though their revenue and stock are at peak. They are meticulous about cost saving even if the company is doing well. They always have a consideration for worst case scenario in the their growth strategy. How would we find such company? I look at past 4 earnings results that exceeded the company forecast consistently. Not even 1 miss. Money speaks! Without well thought plan and meticulous a company can not overdeliver consistently during market ups and downs.
Ignore The Hype
Best time to invest is when no one is talking about a company but all facts and signs say, “Invest in me!”. It is ok if you want to go for hyped up shares. You can well money, a lot of it from short term hyped up stocks. There are can some hyped up good stocks too. However, I stay away from them for the time being. I’d rather be 3-6 months ahead of media (and social media) to ensure I am at least 1 step ahead of the game.
Never Buy Without Technical Analysis
While fundementals rule the price. I take 1 last look at the chart to find the right price to buy. Note that I have already decided by now that I found a good company who has a potential to be great soon. At this stage, I’m looking for a great price. Technical Analysis is the only way I know to find the right price to buy low.
Finally…
I look for more indicators than the ones listed here. What are some of the indicators you look at to find Good companies who are about to turn into a Great company?
Most of the ideas here are from Good To Great (by Jim Collins). Jim Collins wrote about how to turn a good company great. I learned from it and started identifying companies by the characteristics he mentioned. I’d say its a must read book for any investor!
Further Reading: https://goodtogreat.community/2022/02/16/what-is-good-to-great-investment/
Disclaimer: I am not a professional investor. I do passive investing and leave it there for months and years. Please do not consider my words as professional investment advice. I’m here to share my understanding and learn from others.