What Quality Growth Really Means

Second, and related, these cash payments fall directly through the cash flow statement as free cash flow. So, similar to revenue, they give a massive (but short-lived) bump to cash return on capital. Put this together with the revenue issue and we have a handful of pre-clinical stocks "polluting" the Quality Growth spell at any given time.

Now, that's not to say that none of these pre-clinical names cannot do well. Indeed, successful early trials are a good thing. But they are not really what the screen was designed for.

We do have some mitigation techniques in place. For one, Quality Growth ignores "suspicious" statistics, which in this case means statistical values in the top 1% of the market. This does a pretty good job of eliminating statistical oddities, but not a perfect one.

We've also thought about manually removing some of the pre-clinical biotechs that show up in the spell, but in the spirit of keeping it as mechanical as possible, have not yet done so. This may change in the future - I would welcome any thoughts on the matter!

The Flywheel of Quality Growth

By adding a requirement of solid cash returns on capital to a simple 3-year revenue growth screen, we can compile an attractive list of potential investment opportunities going forward. These companies are growing rapidly, and doing so with their own money - the absolute best way to grow. It sets up a "flywheel" of self-sustaining growth that can lift both the company and its shareholders to the massive 100%, 200%, or more returns that are truly meaningful to a family's portfolio.

So far, its working pretty darn well!

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Disclosure: Steve owns no stocks referenced here.

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