Investors seeking great stocks often start by looking for robust top- and bottom-line growth. Unfortunately, that's also where many people stop looking. Respected fund manager Bill Nygren couldn't be happier about that unfortunate trait -- if only because it gives him an edge.
Nygren, who manages several Oakmark funds, thinks that investors give short shrift to the balance sheet and the statement of cash flows. He rightly points out that the market usually recognizes and amply rewards revenue growth. Look at Sirius XM Radio
These are not undiscovered gems. Many investors already like Sirius's dominant position in satellite radio, its strong sales of factory-installed units in cars, and its tax-loss carry-forwards, which will shield billions in future earnings from taxes. They also appreciate Baidu's potential, its accelerating revenue growth, and the vast untapped market that still awaits it. With so many people already clamoring for their shares, investing in these popular companies won't give you a huge margin of safety.
Nygren, like most successful value investors, seeks not just attractive companies, but also attractive prices. Thus, he looks at cash flow and other metrics that most other investors tend to ignore. After all, a company can boost its earnings significantly if its revenue contribution gets augmented by cash from investments.
When questioned this summer on why he was still holding Apple
Nygren has favored DirecTV
He also spoke highly of Medtronic
Great investors think alike
I was happy to notice that in 2009, Nygren bought into Precision Castparts
Revenue growth is critical for any company. Without top-line growth, the bottom line is doomed. Still, it pays to look beyond revenue growth and the income statement when you're seeking standouts for your portfolio.
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Longtime Fool contributor Selena Maranjian owns shares of Apple and Medtronic. Baidu is a Motley Fool Rule Breakers selection. Apple and Precision Castparts are Motley Fool Stock Advisor recommendations. The Fool owns shares of Apple and Medtronic. Try any of our investing newsletter services free for 30 days. The Motley Fool is Fools writing for Fools.