Market timing is not a core strategy of the GeoInvesting philosophy. However, attempting to identify individual stocks in the prime of their financial performance period is central to our investing approach.
When is the right time to own a particular stock? We often define this as a time when a company is about to enter the meat of an EPS growth cycle.
Through the use of analyst EPS estimates, we can create GeoPowerRankings (GPR) to help us identify opportunities like these. The GPR is the amount of consecutive quarters that a company is expected to experience EPS growth of around 30%. The higher a stock’s GPR, the more timely and lucrative returns can be. From our experience, stocks with a minimum GPR of 3 or 4 can begin to offer lucrative and timely returns.
Going a step a further, companies that have failed to exhibit robust EPS growth in recent quarters but are about to attain a favorable GPR can offer some of the most rewarding scenarios. These are the diamonds in the rough and are often the stocks that will come to the forefront with strong EPS growth seemingly just around the corner.
We prefer to buy stocks with forward P/Es of less than 15 that are one quarter away from a favorable GPR. In essence, we have a value+growth+momentum strategy. Looking at past growth rates is also important, but we believe investors place too much weight on this statistic. Actually, a lackluster past can lead to a bigger P/E discount and greater expected returns. In these cases, finding companies with a lousy or mediocre past that have restructured operations can increase investment gains.
Of course, having said that, some objectivity has to be allowed when choosing growth rates for GPR analysis. We are willing to look at quarterly growth rates of less than 30% if the majority of EPS growth in the targeted period is over 30% and especially if the PEG ratio is favorable. We also attempt to verify that forward EPS growth rate will be close to 30%.
When EPS estimates are not available, other good ways to gather information are to conduct interviews, scrutinize press releases and listen to conference calls. As a matter of fact, these tasks should also be performed when estimates are available. A successful interview with high GPR is a recipe for success.
Updated November 20, 2019