Ask Colin

Have you any fundamental criteria you go by, in selecting or filtering growth stocks ? For example how would you apply fundamental analysis to WSF, HVN, COH and MBL?

The philosophy behind the filters for value stocks are that these essentially industrial companies generate a maintainable earning stream. We can therefore use historical ratios as a guide to the future.

However, with growth companies, the earnings stream is expanding. We should therefore look to future earnings projections rather than current earnings, on which they will tend always to look expensive. The problem is though in arriving at satisfactory earnings projections. Just as technical analysts are hopeless at predicting the future, so are fundamental analysts.

For this reason, I tend to find growth companies using the charts only. However, that rather simplifies what I do, because I read the Financial Review all the time and have done so for 30 years. Over this time I build up a good knowledge of companies, their management and their industry. So, I know the type of company that is behind the chart.

If you want to try to do some work in this area, there are a lot of different approaches and I suspect that all of them work to some extent. What you are looking for ideally is growth in earning per share, high return on equity and so on. However, in the end you will have to came back to the charts to tell you whether there is a consolidation process or a mark-up process going on.

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