We firmly believe that growth stocks have an important role in all portfolios, providing protection against inflation and an opportunity for capital appreciation. This belief is based both on our own investment results and the historic performance of growth stocks.
It has long been our conviction that, by investing in growth companies that are fundamentally sound, we need be less concerned about the market’s short-term volatility and can be more confident, over time, of achieving above-average portfolio appreciation.
“Earnings growth is the key determinant of stock price performance.”
–William C. Miller
The term “growth stock” has varying meanings within the investment profession. Hartwell defines a growth stock by a company’s ability to generate unit volume growth while maintaining pricing flexibility. We then identify several specific criteria that support our definition.
- We seek those companies that exhibit unit volume growth and the ability to maintain pricing power.
- Our analysis leads us to favor those few companies where the catalysts for future earnings and revenue growth are most well defined.
- We focus on the company’s financials, industry position, proprietary technology, differentiated products and marketing skills. Without these competitive strengths, the company will lack pricing flexibility. We find that this element is critical to the success of our investment. Manifestations of pricing flexibility are revealed in robust pre-tax margins, excess free cash flow, and high returns on equity.
- The inherent advantage of investing in industry leaders has been made clear to us. Dominant companies tend to: have lower unit costs, have more free cash flow to invest in research and marketing, and remain dominant due to their balance sheet strengths and
management controls.