Across all of DCM’s investment strategies, we emphasize the benefits of healthy growth. A company’s fair value is determined by the future cash flows it is expected to generate. Therefore, a company steadily growing its cash flow should see an increase in its stock price over time. This is a simple concept, but the challenge lies in finding the companies we think can grow their fundamentals faster than average. Through our research efforts, we have found three factors we believe are reliable hallmarks of healthy growth. They are: Competitive Advantage, Momentum, and Predictability.
For a company to consistently grow, it needs to have an edge over its competition. When evaluating companies, we look for signs that they are doing something truly unique. For example, Starbucks’ image, brand recognition, and technology are unmatched by rivals. With such advantages, the company is well positioned to take business from peers, open more stores, and push new products. We can see the potential for growth exists.
Once we have established that a company has a foundation for growth, we need to see that the fundamentals are actually increasing and that the market notices it. We call this factor Momentum. When we see fundamentals grow, it verifies that a company has been able to follow through on its growth opportunities. If accompanied by a rise in stock price, it is a sign that the market believes the company is creating long-term value.
Last, we need to see that the company has historically had a strong correlation between fundamental growth and price appreciation. We call this factor Predictability. This ensures that the recent action is not just a fluke. Instead, the company has a long record of executing its growth strategy and being rewarded with a higher stock price. With a history like this, we have greater confidence in the company’s trajectory.
