Chapter 9. Add It Up
In the previous chapters we reviewed each dimension of the Quality, Valuation, and Growth framework on an individual basis. In this chapter we'll take the framework to the next crucial step: We'll put these three dimensions together and explore their interactions with each other. Also we'll answer the question: "Should you compromise on any of the dimensions of the QVG framework when selecting stocks for your portfolio and if 'yes,' what dimensions?"
Sorry, that's two questions.
One Out of Three: Not Enough
You found this "great" company/stock that receives high scores in only one QVG dimension. Should you buy it?
Quality—Yea; Valuation and Growth—Nay
A company that has a high score on all or most of the factors that we discussed in the Quality chapter, but lacks meaningful earnings growth and/or dividend yield and is overvalued, is not a good investment no matter how high-quality that company is.
H.J. Heinz, for instance, was a great, high-quality company in the late 1990s. Although it had some debt, it also had stable, noncyclical cash flows that provided respectable interest coverage; its return on capital exceeded 20 percent; it had the ketchup market mostly to itself worldwide, as its brand was synonymous with ketchup—an indisputably high-quality company. However, it was lacking on the growth and valuation fronts. In 1998 it was trading at about 23 times trailing earnings—not a shocking number, at least not in relation to other stocks at the time. Considering ...