“Quality” investment style is a securities selection approach based on a comprehensive analysis of a particular issuer’s corporate condition.
According to numerous academic studies and opinions of world’s famous professional investors (Benjamin Graham, Warren Buffett, Peter Lynch, Anthony Bolton) “Quality” investing style has four basic criteria to examine:
- Business model
A focused and dedicated approach (“hedgehog concept”) to product manufacturing / provision of services for the use of a particular industry or a group of interrelated industries. A plausible product portfolio and its development potential, geographical exposure, market share, industry growth potential. An identification of a particular company’s development phase is a crucial component of the analysis – whether it is an early stage development (“Star” type company with soaring revenue dynamics and investments) or a maturity phase (“Cash cow” type company with stable revenue stream, sufficient cash flows and ample dividends).
- Financial stability
An examination of company’s balance sheet and its structure. Assessment of a company’s debt burden and future creditworthiness. Analysis and evaluation of sales dynamics, cash flows and investment programs. Special attention is devoted to evaluation of earnings quality. Qualitative earnings exclude one-time gains (i.e. non-core asset sale) and other types of gains attributable to non-core business activity of a particular company.
- Corporate governance
The common or generally accepted dogmas of a highly qualitative corporate governance are:
- The presence of family interests or founders (or founder’s ascendants) within the shareholding structure of a company.
- A separation of CEO and BoD chairman’s roles between two persons
- An availability of a relevant professional and academic background among executives
- A presence of independent directors and fully independent audit committee within BoD
- A plausible compensation scheme
- Market valuation
The final accord of an issuer’s corporate quality is an attractive market valuation of its securities. In a nutshell, an ability to purchase a security below its intrinsic (fair) valuation and / or below the valuation of its peers and / or market’s average
