Growth Stock Screener

Key Metrics used in Rule #1 Investing

Town employs a series of quantitative metrics to screen for stocks that fit his investment criteria.  We have used these metrics in our Growth Stock Screener below.  The essential metrics Phil Town emphasizes are:

1. Return on Invested Capital (ROIC): Phil Town seeks out businesses that have consistently maintained an ROIC of greater than 10% over the past ten years. This indicates the efficiency at which a business converts its invested capital into profits
2. Equity Growth Rate (Book Value Growth): For Phil Town, a business should have achieved an average equity (or book value) growth rate of at least 10% annually over the preceding ten years.
3. Earnings Growth Rate: Businesses should have demonstrated an annual earnings growth rate of a minimum of 10% over the last decade.
4. Sales Growth Rate: A consistent sales or revenue growth rate of at least 10% per year over the past ten years is sought after, indicating a solid market demand for the business’s products or services.
5. Free Cash Flow (FCF) Growth Rate: Phil Town emphasizes a consistently positive FCF. Moreover, he seeks businesses that have grown their FCF at an average rate of 10% or more annually over the past ten years, signifying sound financial health.
6. Debt: Phil Town uses the Long-Term Debt to Free Cash Flow ratio to assess a business’s leverage. He prefers businesses that could theoretically pay off their entire long-term debt with their current free cash flow in less than 3-4 years.
7. Price-to-Earnings Growth (PEG) Ratio: Phil Town looks beyond the conventional P/E ratio, which measures the current price of a stock against its earnings. Instead, he places significant value on the PEG ratio. This metric divides the P/E ratio by the business’s earnings growth rate over the last 10 years. In incorporating past earnings growth, the PEG ratio offers a broader perspective, considering both present valuation and earnings trajectory (as an indicator of future growth). Town seeks businesses with a PEG ratio below 1, interpreting such a value as an indication that the stock might be undervalued relative to its earnings performance and growth.
8. Margin of Safety (MOS) Price: Phil Town calculates a business’s ‘sticker price’ or intrinsic value based on anticipated future cash flows and his desired investment return. He then aims to purchase the stock at a price that’s at least 50% below this sticker price. He refers to this significant discount as the Margin of Safety, providing an added layer of protection against potential overvaluation or unforeseen adverse events.  The Margin of Safety Price can be calculated using our Intrinsic Value Calculator.

In addition to these quantitative parameters, Phil Town also stresses the weight of qualitative attributes. Understanding the business thoroughly, ensuring it possesses a durable competitive advantage or moat, and verifying it’s guided by competent and ethical management are also key elements of his investment approach.