Principles

I am in the middle of the book Principles by Ray Daleo. If you haven’t read it yet, I highly recommend it. I am developing principles that I want to use for the companies I want to invest in.

One of the principles I have come with is:

Revenue growth ACCELERATION leads to stock price increases from the growth and multiple expansion.

If I can find high revenue growth companies with the growth accelerating, and that growth is contributing to margin expansion, I have found a powerful force to push the stock price up.

Arista Networks and Adobe are good examples.

Jimbo

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Yup, I’ve not read the book, but I’ve arrived at the same conclusion. Second order derivative of growing growth is very powerful indicator of rapidly increasing stock price.

Second order derivative of growing growth is very powerful indicator of rapidly increasing stock price.

So is a chart of “rapidly increasing stock price.”

http://invest.kleinnet.com/bmw1/stats25/MNST.html
http://invest.kleinnet.com/bmw1/stats25/NEOG.html

but only until it isn’t!

There is a long term correlation between business performance and stock price but there are many other factors that affect short term stock prices such as earnings surprises and sector rotation. Depending on the growth rate you might or might not wait for the “fat pitch” which might never come with a real blockbuster stock.

I’m not knocking “principles.” I think they are more useful on the negative side, reasons to avoid a stock: too much debt, too many fake assets (goodwill and intangibles), untrustworthy management, lack of earnings. Any one of these might destroy a stock.

On the positive side, suppose you find a very favorable principle, it could well be that the market also noticed and has already added it to the price thereby neutralizing or muting its forward effect.

Prices don’t get enough respect. In most other activities, racing and baseball for example, track record is your primary indicator. But for value investors the price track record gets no respect, they look for that ever elusive intrinsic value.

I think price track record should be a leading principle.

Denny Schlesinger

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I hesitated before I posted . . . Maybe I should have qualified my post more carefully. Accelerating growth is worth paying attention to, but most certainly is not the only thing. The business fundamentals do not fade in importance in light of growing growth.