David Gardner’s Proven Formula for Consistently Profitable Growth Investing
Forget what you’ve heard. Consistent, reliable, repeated success as a growth investor is possible. With a proven formula, picking winning growth stocks can be a predictable – and very profitable – investing strategy.
David Gardner is walking proof.
Check this out: As of January 18, 2016, of the 204 active buy recommendations David has made since 2002, a shocking 66.2% are winners! And the gains of those FAR exceed any loses. And that’s though some of the most turbulent times in stock market history!
It’s remarkable. There is probably not another investor on Earth who can claim to outperform the market with the same kind of “Old Faithful” consistency.
If you’ve been scared of making growth investments because you’ve been told they’re “too risky”… “too volatile”… or you simply just don’t know what to look for, this special report is what you’ve been waiting for.
Why This System Works
When we talk about growth, we’re essentially talking about a company selling more goods and services this year than it did last year — and expecting to sell even more the following year.
Yet you shouldn’t just search out hot companies or high growth rates in isolation.
David’s investing style is about identifying companies that are he thinks are likely to turn a high growth rate — or an anticipated high growth rate — into a sustainable force that drive cash flow for a very long time to come.
With the right principles and a little discipline, you can be a successful growth-stock investor too — and the payoff can be huge.
Rapid growth can lead you to some of the biggest returns you’ll ever find as an investor. Yet at the same time, chasing growth by itself is a ticket to mediocre performance … or worse. So how can you find the companies that will lead to superior returns and avoid the mistakes that will drag down your performance?
Here’s a deeper look at six criteria David uses to help identify a winning growth stock. Not every great growth investment has all these traits, but the companies that exhibit all these characteristics deserve special attention. He’s found they’re most likely to be the ones that sustain extraordinary growth over a long period of time.
1. Top Dog and First Mover in an Important, Emerging Industry
A top dog holds the dominant market share in its industry; usually it’s the largest by market capitalization. The first mover is the innovator that first exploits a niche — essentially creating its market. And finally, that niche must actually be worth dominating.
Who has put all of this together? Think of Microsoft in software, Starbucks in coffee, Whole Foods in natural and organic groceries. Starbucks didn’t invent the coffee shop, and Whole Foods wasn’t the first natural food store. But these companies were the first to conceive of these businesses on a national and ultimately international scale, when others didn’t see growth opportunities.
Winners aren’t hidden; they’re right there before our eyes, bringing disruptive technology, clever and effective marketing, or a brand-new business model.
2. Sustainable Advantage Gained Through Business Momentum, Patent Protection, Visionary Leadership, or Inept Competitors
Successful businesses attract competition. The critical question is how well a company can fend off that competition.
In some businesses, like the pharmaceutical industry, patents can enforce a lasting competitive advantage. On the other hand, patent protection can be problematic in the software industry, where protected inventions can often be worked around.
Luckily, there are other ways of protecting a competitive advantage. Companies have trade secrets (the formula for Coke isn’t patented; it’s a well-guarded secret known to only a few employees), and they can build expertise that others find hard to duplicate. Some businesses require daunting levels of capital investment to establish, while others invest in their reputations and brand names. Sometimes a company’s leaders are just smarter than the competition — and sometimes competitors find they just can’t adapt to a changing world.
The key is to find what we call a company’s moat — its bulwark against inevitable competitors — and figure out how many alligators are in it.
3. Strong Past Price Appreciation
Consider an investor’s take on Newton’s law of inertia: A stock on the rise tends to remain on the rise unless an outside force disrupts its path.
The best growth stocks continue rising, because their advantages allow them to sustain remarkable earnings and cash flow growth and to continuously win new converts among the ranks of both customers and investors. Don’t count on momentum to save your bacon in the absence of other strong fundamentals. But a strong company firing on all cylinders can sustain a remarkably extended run.
4. Good Management and Smart Backing
Good management trumps almost all other concerns. Think of a company like Target: At its core, it’s just another discount retailer with few structural advantages over its rivals. Yet by dint of good management, it’s been very successful and returned a lot of value to shareholders. Better a mediocre business with great management than a great business with mediocre management. Over time, those latter guys will screw up a free lunch.
Now imagine adding great management to a great company — it’s a powerful force.
Judging the quality of a management team is a bit subjective, but that’s because it’s human beings who head these companies. Luckily, we’re human beings, too, and most of us are equipped with skills to assess the more subjective aspects. Listen to conference calls and investor presentations. Even if you can’t talk to management directly, the Internet makes it easy to hear how the top brass thinks and how they interact with investors. Are they smart? Visionary? Inspiring? The heads of the best growth companies are often career entrepreneurs with a track record of business formation you can look to. Even if you can’t put a number on it, you can certainly get some idea of whom you’re dealing with.
5. Strong Consumer Appeal
It’s almost impossible to overstate the power of a strong brand. If a business has mass consumer appeal, sustaining extraordinary growth is that much easier. A brand eventually reinforces itself — that’s why a company like Starbucks has never really had to advertise. A brand also becomes associated with an experience. We’re creatures of habit, and when we have to think less, it makes our lives seem easier. The habit that comes from a strong brand — knowing where your next cup of coffee is coming from — immeasurably strengthens a company against its competitors. It also gives a company pricing power over rivals — you expect to pay more for a brand name, right?
Of course, some great companies work in specialty businesses that simply don’t have mass consumer appeal. That’s OK, but we want to know that the company’s product, name, and reputation constitute a brand among the people who matter. If you’re looking at an esoteric software business, ask yourself this question: Could this company price its product 5% or 10% higher than its competitors and still maintain market share because of its reputation and loyal customers?
6. Grossly Overvalued According to the Financial Media
This might sound like an odd factor. Who wants to buy a stock that those wise financial commentators say is too expensive and poised for a tumble?
In fact, being derided as overvalued is a trait shared by many of David’s most famous stock recommendations that supposedly smart investors avoid … stocks that go on to double, triple, quintuple, and more over the years. The “too expensive” label comes from underestimating how a long-term winner can disrupt its industry, displace competitors, and grow over a relatively short time. Investors’ fears leave many on the sidelines, only to come in later and drive the stock up further as the writing on the wall becomes more apparent.
These six criteria aren’t guaranteed to weed out every dog or to point you to every winner. But they offer a framework for evaluating fast-growing companies. David thinks they can focus your attention on the characteristics most likely to be shared by companies that turn growth into extraordinary performance over a long period.
