Thank you for sharing, and hope your shoulder gets better soon.

Yes, WTC has been a hard one indeed. I watched it all the way from $5-6 to now without ever gaining enough confidence to pull the trigger. The highly acquisitive strategy, combined with consistently high valuation kept me away despite other redeeming characteristics.

Testing my Filter with PME, WTC and ALU

One of the most important aspects in investing is what I call filling the funnel. This means having the right stocks on the watchlist. There is the error of trading out of good stocks too early, and the error of only coming across them when they are way past small cap size. My errors for APT PME WTC ALU XRO have all been of the second type. Of course, I am not saying I would have bought all or any of these but I would have like the option!

If you spend your time looking at the wrong stocks, no matter how good an analyst you are, likely you are fighting a large headwind.

Especially for me, who probably takes a good two years of analysing stock in real time before I get to a level of confidence where I can put a large amount of money into a stock, picking up stories as early as possible is important.

A filter is a generic measure. The filter should cover a lot of stocks quickly and simply. The aim is to identify the right stocks to persevere with and put more time into. It is not the end or the beginning of the end!

The filter I use regarding micros revolves around monitoring three factors. Those being, revenues, Pre tax profits and cash flow from operations (CFO). These measures are used because they are easy to understand and easily identifiable.  The prospects of a large successful business being developed without showing significant momentum in all of these items is relatively low imo, although always possible. When looking at the accounts I make some adjustments for items like impairments, fair value adjustments and any other unusual non recurring or non cash items I can find. However, these adjustments are not common. Secondly, I pay some attention to dilution, to be theoretically correct the above should be on a per share basis, but I just usually eye ball this factor.

I would expect to see a successful business firstly have continually strong revenues, followed by improving cash flows, and finally by strong pre tax profit growth. Focussing on revenues is quite self evident. Businesses need a product to sell and should be able to sell it, strong sales growth is evidence of this ability. Secondly, I like to see a certain level of sales, above the friends/family or luck levels. Pre tax profits are used just to avoid the tax expense accounting issues. Where cash flow from operations are used as a measure to show if profits are cash backed and therefore of better quality. Cash should actually be coming out of the business, not just accounting profits. I also use six monthly rests. The reason for that is because I believe quarterly results are just too volatile. And I would rather put two quarters together before you can start to assess any real trends.

My list is over 100 micros covered in this way. Although there are plenty of other things to consider once you deepen the analysis, they do give a reasonable strong initial signal, in my view.

Having followed this system for a while, I thought it may be worth testing with a “would I have pcked this up”. A reconciliation by looking at three of the most successful stocks over the last 10 years, by examining their more formative years to see how these financials metrics measured up for those three stocks as they were building into massive businesses.

I went back and looked at Promedicus, Altium and Wisetech’s historic financial statements. Below are the graphs on rev/PBT/CFO and then assessed whether they gave an indication of what was to come, would my measures have picked up the stories? Where there any conclusions I could take out of the growth paths that these companies forged. Below are the charts (WTC is annual as it covered the IPO period so lack of semi-annual data). Graphs are Revenues (LHS in blue), PBT orange and CFO grey RHS ( I hope).

Having looked through over a 100 of these style of charts the above three are actually quite unusual. Firstly though., I'm pretty happy that the filter would have picked these up. Any stock that replicates the growth path would have triggered at least a serious look. That is, looking at consistent revenue pretax profit and cash flow trends, the filter would have picked up all three companies.

The standouts in these graphs to me are that all firms were profitable, and to some extent, quite early and consistently in their existence. Secondly, they showed consistent revenue growth, at double digit rates. That consistency at the pretax and cash flow levels was also there, but to a lesser degree. What else? There were no large declines in revenues. Even at the PBT/CFO levels, there were flat periods but no significant reversals that lasted any significant amount of time. Even profits turned around very quickly and very rarely showed issues.

The strength of these businesses are quite apparent when you compare it to the dozens of other charts I've looked through. The charts usually show inconsistent revenue growth, with Cash flow and pretax profits all over the place.

The summary is that I will persevere with my filter. I think it will do the job. Of course, there's a lot more to it than just that, for instance, there's no valuation method measure here. There would be times when the valuations were excessive and times when they were not. There also times when the when profits did nothing for a period. The philosophy here is that quality businesses that can show significant growth are rare and identifying them as early as possible is important and then holding on for the most part.

Hope this is of some help. Thanks for reading. Still recovering from shoulder surgery so I used dictation app to help with this so please forgive the lack of flow.