Having identified industries of interest, we identify companies of interest within those target industries. We evaluate the companies to determine which ones we believe are superior to their competitors and, most importantly, which ones we believe are superior growth investment candidates. In making this evaluation, we use a variety of information sources and criteria. Information sources may include filings by the company, meetings with company management, contacts with professionals in the same industries, meetings and presentations at investment and trade conferences, business publications, online databases, and research obtained from brokerage firms. Among the evaluation criteria is a group of eleven characteristics developed by Shaker that helps determine what we call “fundamental superiority.”
Our Eleven Characteristics of Superior Growth Companies
1. Demonstrable growth
We look for companies in robust industries that have proven their ability to grow faster than similar companies.
2. Sustainable competitive advantage
It’s not enough for a company to be growing. We have to be convinced that it possesses a sufficient competitive advantage, which will allow it to continue to excel.
3. Dominant market leadership
More often than not, strong companies get stronger at the expense of the weak. We want a company to rank in the top three in market share in its industry segment, and to dominate a product or service niche.
4. Strong management
We spend considerable time talking to management. We seek to be convinced that senior managers have formed a coherent team and are collectively prepared to respond to marketplace challenges in a timely and creative manner.
5. A single mission
We are most comfortable when management is focused on a single, well-defined business.
6. Many customers and many different products
We prefer a diversified customer base and a multi-product line, so that a company is not left excessively vulnerable to several key buyers or to a limited number of product offerings.
7. Consistent development of new products
We’re attracted to companies that place a significant emphasis on research and development and are consistently bringing innovative products and feature refinements to market.
8. Companies that are praised by customers and competitors
Over time, those companies that are recognized by customers as being “the best at meeting their needs” generally prosper far more than companies with less customer focus.
9. Positive earnings or cash flow
We’re hesitant to invest in a company that depends heavily upon external equity capital to remain in business. We seek management teams that are extremely focused on creating a level of earnings and/or cash flow that can support ambitious growth plans.
We’re attracted to growth companies that maintain a conservative balance sheet with significant cash positions.
We’re pleased when management owns a significant portion of a company. This virtually assures that management’s interests are closely aligned with shareholders’ goals.