In my last article, I analysed the company Luceco (LON:LUCE) using a framework that was based on the 100-baggers book. I picked Luceco because I already had some knowledge of the company, having recently researched it. However, which company to analyse next was less obvious. As of writing, my Buffett and Munger Screen generated 49 results, and my 100-baggers screen had 38 results, giving 85 unique possibilities.
The most obvious way to narrow down the field is to exclude the largest and smallest businesses. The largest businesses, such as Unilever (LON:ULVR) , are far less likely to be long-term multi-baggers. The smallest of businesses tend to be niche ones that will likely struggle to scale. Limiting the market cap range from £20m to £1bn should keep companies only in the most promising size range. In addition, some of the screen results are non-trading businesses such as funds or REITs. It makes sense to exclude these. This leaves 49 companies as potential high-return stocks.
From these candidates, the temptation is to pick some obvious investor favourites. However, popularity rarely generates great investment results, as Stockopedia founder Ed Page-Croft describes here. And many investors would have dismissed lighting and power products supplier Luceco out-of-hand, whereas the analysis of the numbers suggests that this is a quality company (although one without the operational leverage to really be a top-performing share.) So choosing the next company to deep-dive based on gut feeling is likely to be suboptimal, too.
In times of uncertainty, quality company investors can always turn to Buffett for the answer. His key observation was that:
Time is the friend of the wonderful company, the enemy of the mediocre.
So, if we have a wonderful company, this should be visible in the long-term results, even if it is currently facing a short-term setback. Conversely, poor businesses that happen to be facing a short-term boom should be able to be excluded from their weak long-term track record. Although the StockReport has five years of numbers, Stockopedia has ten years of data for the Balance Sheet, Income Statement and Cash Flow Statement on the Accounts page:
Not every company in these screens has been listed for ten years. Stockopedia includes pre-IPO figures for many companies from their listing prospectuses. However, this may still give limited data. I will exclude any companies that…
