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Top 20 Description Scorecard Complete Roster Archives Disclaimer

Description

In sharp contrast to the flight of many investors from traditional stock valuations based upon strong earnings growth, Inve$tWare would like to weigh in with our Inve$tWare Roster of Quality Companies. We unabashedly and without shame worship those time-tested standards of quality. Investing for the long term in companies that have achieved these standards has consistently produced returns well above the average over the past half-century, through both up and down markets.

In the midst of the "Dot.com Bubble" of the 1990s which deflated not long ago with a vengeance, we began to recognize those companies that consistently demonstrated their ability to generate income, but were forsaken by those looking for the fast buck.. We believed that those that ran to them while they were still languishing would be rewarded handsomely. This, of course, turned out to be true.

We believe that four criteria adequately identify the quality characteristics of a company: growth of revenues, growth of earnings, pre-tax profit margins, and, to a lesser extent, return on equity. Revenue growth is where it all begins. The emergence of a company's earnings strength is the direct result of consistent revenue growth, coupled with management's ability to contain costs and provide prudent debt management. We have chosen these criteria because they succinctly characterize a company's performance, and have historically proven to be reasonably reliable predictors of future performance.

The companies selected have demonstrated such qualities to a commendable degree, based on growth and stability, and are companies culled from a database of over 9,000, with data provided by Market Guide. The vehicle used for the screening process is AAII's Stock Investor Pro, utilizing a comprehensive set of parameters established by Inve$tWare. The purpose of the screen is to identify and rank the top twenty companies that meet the following criteria:

Publicly traded for a minimum of five years
Revenues greater than $100 million, that have grown for the past year, three years, and six years at an annual rate commensurate with its size and maturity, and having a stability rating* of at least 95%
Earning per share having grown for the past year, three years, and six years at an annual rate of at least 14.9%, having a stability rating* of at least 95%, and having an analysts' consensus estimate for future growth of at least 14.9%
Gross profit margin as good as or better than its peers in its industry and not trending down
Return on Equity as good as or better than its peers in its industry
Stability rating We use the coefficient of determination, a statistical term (R-squared), that measures the degree to which plotted points fall close to a line that mathematically best describes them. Where the points all fall on the line, the stability rating would be 100%; and where the points have no apparent correlation to the line, the stability rating would be zero.

Companies accumulate points based upon these criteria with special emphasis on both growth and stability. Because risk generally varies inversely with company size and maturity, acceptable revenue growth in larger companies is lower than in companies that are smaller or newer. Beginning at 7% compounded annual sales growth for companies whose revenues exceed $4 billion, minimum acceptable growth increases to about 20% for companies with as little as $100 million in revenues. Therefore, we have attempted to factor out company size by crediting growth in excess of the acceptable minimum rather than for simple growth.

We have also placed a premium on the stability ratio on the assumption that the more steady the growth, the more predictable future performance is likely to be. However, should revenue or earnings growth increase over time instead of decreasing as is customary, such positive performance could adversely affect the stability rating. To avoid penalizing companies whose growth displays this favorable trend, Inve$tWare has incorporated a compensating index.

We recognize three levels of quality: Gold, Silver, and Bronze, Gold being the highest level of achievement.

The companies are ranked according to their point value for that month; and this premier company listing, updated monthly, will display the top twenty companies passing the screen. The three companies earning the highest point value will inhabit the Gold plateau, the next seven companies will reside on the Silver plateau, and the remaining ten companies will occupy the Bronze level. We will also maintain an annual scorecard indicating a company's current position as well as its prior achievements.

The roster will be updated as information becomes available each month. The failure of a company to remain within the top twenty may mean only that another company has displaced it in that ranking for that month and not that it has necessarily fallen from grace. It may well appear in the Complete Roster of Quality Companies-all of which are worthy of recognition as top-notch firms meeting all of our essential quality requirements, though not quite as stringently as the top twenty.

The Golden Bull award, our annual recognition of quality will be given to the company aggregating the largest number of points for the year, based upon the criteria listed above. Because it is based upon the total number of points achieved throughout the year, a company may be accorded this honor without necessarily having appeared among the top twenty companies every month.

The characteristics of quality and value are separate and distinct. Value, as we use the term, refers to the reasonableness of the current price, measured by the potential reward, balanced against the potential risk of loss, and tempered by the average historical multiple at which the company has traded. It is important to note with caution that inclusion on the Inve$tWare Roster of Quality Companies recognizes a company's achievement of high quality but makes no effort to assess its investment potential.

No matter how excellent the company, if the price paid for the stock is too high, it is not a good investment. Many if not most of these companies may be priced at or above a reasonable price. This list should not be construed as a recommendation of any kind. It is for informational purposes only and intended only to stimulate further investigation. We therefore caution everyone not to purchase stock in any of these companies without first completing a study to determine its fair price, for which purpose we, of course, recommend the use of either of our software products, the Investor's Toolkit or Take $tock.

Top 20 Description Scorecard Complete Roster Archives Disclaimer