Identifying the next ASX Hall of Famers and what drives share prices

On Tuesday QVG Capital presented a webinar which talked about, among other things, some of the greatest ASX-listed companies of all time. The purpose of this exercise was to identify the financial characteristics of these ‘hall of famers’ to see if there’s anything we could learn.

Here's the data (click to enlarge):

(Source: QVG Capital)

Names like REA Group(ASX: REA), CSL(ASX: CSL), Aristocrat(ASX: ALL), Reece (ASX: REH), Cochlear(ASX: COH), Dominos(ASX: DMP), ARB(ASX: ARB), Resmed(ASX: RMD) and JB Hi-Fi(ASX: JBH) are all undisputed ‘winners’. All these companies have been at least 20-baggers with CSL and REA returning over 100x to patient shareholders.

What’s clear from the data is that high returns on capital and compounding revenue growth for many years in the teens is the ‘secret’ to gaining access to this elite cohort.

An example of a stock we own with this sort of financial criteria is Objective Corporation. OCL has already been an outstanding performer, but the combination of very low customer churn and consistent reinvestment in product R&D means that we think Objective can continue to grow revenue in the mid-teens for many years.

Of course to finish first you must first finish and it’s interesting to note that the gearing of these businesses is relatively low. Low debt means it’s more likely a business can self-fund their growth and survive tough times without diluting shareholders.

Importantly, it’s not just a bunch of cherry-picked QVG data that shows revenue and earnings growth drives share prices over the long term. A study from BCG and Morgan Stanley presented below shows the same.

In the short-term the change in multiple (or sentiment) accounts for almost half the returns from holding a stock. 

However, as time frames extend beyond a year, fundamentals such as revenue growth and margins (the sum of which is earnings growth) comes to dominate as the source of returns.

We felt these slides were worth sharing as they provide an insight into our investment process and why we are so focused on high return, high growth companies. 

The maths is irrefutable. If we can identify companies that can deliver these numbers for many years and are patient enough to hold them, then good things will happen.

Watch the full webinar

A replay of the webinar is now available on the QVG Capital website for those investors interested in learning more click on this link and scroll down the page to access the replay.