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I keep trying to boil the Cabot growth investment approach down, looking for the simplest possible formulation, and I think I may have finally found it. It all comes down to this: Story. Numbers. Chart. I've been thinking of adding an "and" before chart so I can call it the SNAC approach. Snacks appeal to me.
Investing in Growth Stocks: Take a good look at the company.
"Story" is the business proposition of the company, the product it makes or the service it provides. This is where we try to get a handle on whether the potential market is big enough to keep revenues and earnings growing, and whether the benefit is big enough to make the products/services compelling, and whether there are barriers to entry that will keep competitors at bay. It also includes the history of a company's management team, and whether the folks in charge have shown that they have the imagination and discipline to keep a company growing.
Investing in Growth Stocks: Count the beans.
"Numbers" are the fundamentals. For our growth stocks, we want companies that have a history of growing revenues and earnings (and ideally, earnings faster than revenues). For many analysts, this is the be-all and end-all of categories. Pure fundamental analysts like to believe that they have an advantage over everyone else because they have real numbers to work with. (This is at least partly hogwash, of course, because projections of earnings are built on a shaky framework of guesswork, character analysis and creative thinking, but I'll let that pass.) The important thing is that the company be making money, preferably in increasing amounts.
Investing in Growth Stocks: Get technical
"Chart" is the history of the stock's price, trading volume and volatility, as reflected graphically in the chart. This is the stuff of technical analysis, about which many books have been written. We're looking first for a chart that reflects a stock that is becoming increasingly attractive to investors (price going up) ... and then we're looking for an attractive buy point.
The most important thing about SNAC is that you have to have all three elements in accord to give yourself the best possible odds. You've probably heard of people who get carried away by a great stock story that they heard at a cocktail party. Don't do that.
There's an element of art, as well as science, to picking stocks this way. But you'd be amazed at how nourishing SNAC can be.
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