When analyzing a growing company, consider two factors.
First, check whether it’s benefitting from secular or short-term trends, says Gary Chapman, senior portfolio manager and managing director of Canadian equity at Guardian Capital. He manages the Renaissance Canadian Growth Fund.
If a business has benefitted from the release of a new product or recent acquisition, for example, growth could still be stunted over the long term. To get the full picture, assess short-term earnings estimates, along with future prospects. Also avoid focusing on historical performance data.
Further, if the business is trading at a reasonable price, find out if it’s a dominant market player. High-quality companies, says Chapman, are those that “have achieved competitive, sustainable advantages.”
One of Chapman’s strategies is to meet with the management teams of companies. He attends shareholder meetings, as well as conferences where executives are presenting. And he speaks with analysts about all prospective investments.
In Canada, there are about 240 major stocks in the index and some of those are small companies, he notes. This makes it hard to assess them all even when you have a large research team. So, he adds, “if companies have good drivers of growth…[as well as] comfortable balance sheets and [good] management,” then we stick with those companies. He also looks for appropriateness of risk and reasonable prices.