Underpinning
thebigpicture stock selection methodology is the choice of companies
with ‘superior economic performance'. These companies will typically
have three characteristics:
Profits
higher than required rates of return. All company returns are benchmarked against a cost of capital benchmark. It
is not sufficient for a company to be profitable or growing. Even profitable
companies with growing earnings might be failing to cover their costs of
capital.
Many commonly used
measures of financial performance ignore this fundamental measure of
business performance and determinant of shareholder value.
Improving
rates of return.
Rising rates of return (‘spread momentum’) provide the impetus for better
than average share price performance.
Achievable
growth.
With the growth rate in western economies set to decline as population
growth declines (e.g. Australia’s official government forecast is for long
term GDP growth of under 2% compared with the long-term historical average
of 3.6% pa), it is critical that growth rates implied by share prices
reflect achievable rates of growth.
This analytical
framework incorporates key research findings about what drives
business value.
