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Star Growth Stocks

Star Growth Stocks (yellow stars) are Stock Doctors' top-ranking, high-quality, growth businesses, characterised by their strong Financial Health, solid past financial performance, and manageable active risks. These stocks have been selected and ranked based on their quality and growth factors within their peer groups.

As such, Star Growth Stocks may be attractive investment opportunities that warrant further investigation for those investors who seek capital appreciation over the long term.

Lincoln’s Star Growth Stock list is the result of an extensive and objective screening process which identifies a group of stocks that have collectively shown to significantly outperform the market over the long term. To make the Lincoln shortlist, Star Growth Stocks are characterised by their strong Financial Health, solid past financial performance with manageable active risks. These stocks have been selected and ranked based on their quality and growth factors within their peer groups. These factors include return on equity or return on invested capital, net profit margins, earnings quality, and forward earnings revisions.

As such, Star Growth Stocks may be attractive investment opportunities that warrant further investigation for those investors seeking capital appreciation.

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Star Growth Stocks (SGS) are identified via Lincoln Indicator’s proprietary quantitative methodology and qualitative assessment. Star Growth Stocks as a collective have delivered strong long term returns, allowing Stock Doctor members to invest successfully with confidence, control and peace of mind.

New Star Growth Stocks may be added to the list after each interim and annual reporting period provided. They satisfy Lincoln’s benchmark criteria: Primary Golden Rules 1, 2, 3 for growth and meet a sector-specific (z-score) ranking threshold.

This means they need to satisfy our first and most important rule in the Stock Doctor quantitative bottom-up stock selection framework Financial Health - Golden Rule 1. 

Lincoln's unique Financial Health model assesses key accounting ratios relating to each company's profitability, cashflow, liabilities and assets. It then determines a Financial Health rating appropriate to the company's business risk, enabling investors to confidently focus their attention on financially healthy businesses and avoid potential disasters.

Financial Health is measured on a scale of Strong (blue) to Distress (red).

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To meet the criteria, a company must have two consecutive periods of Strong or Satisfactory Financial Health. It is not sufficient for a stock to be healthy for solely one period due to the possibility of a once-off capital raising which could artificially improve the balance sheet.

If a company passes a primary golden rule, it’s flagged on our 9 Golden Rules page by a gold-coloured number:

Tip: Click on any golden rule number to be provided with a definition of the rule.

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They also need to pass Golden Rule 2 Past Financial Performance.  For growth stocks, it is critically important a business achieve strong earnings efficiency, high-profit margins, robust cashflows and generate positive long-term earnings growth.

To meet the criteria, a company must pass sector-specific growth factor thresholds such as: Return on equity (ROE), Return on Invested Capital (ROIC), Return on Assets (ROA), Net Profit Margins, Earnings Quality (Accruals), Revenue Growth and Earnings Per Share Growth.

These factors have shown significance in generating strong risk-adjusted returns over the long term and are an essential quantitative barometer to help further measure the true fundamental quality and investment potential of growth stocks. 

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If a company passes Golden Rule 2 from a growth perspective, it’s flagged on our 9 Golden Rules page by a gold-coloured number and a star alongside the Star Growth Criteria heading:

Tip: Click on any financial ratio (e.g. Return on Equity) to be provided with a definition of the ratio.
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Then, a qualitative analysis of the company is undertaken by our team of analysts at Lincoln Indicators (Golden Rule 3 - Outlook and Active Risks). This determines whether its past financial performance sector growth factors are sustainable and active risks manageable to ensure that they are investment grade. Lincoln research has shown that a trend in earnings revisions often drives the share prices.

Our analysts do not spend time forecasting company earnings at Lincoln because consensus forecasts already incorporate management expectations. Instead, the real value comes with them understanding the business and identifying any significant risks that can disrupt a company’s ability to remain financially healthy or maintain any one of its growth factors. We will always validate our decision within the Analyst and Strategic Commentary. To learn more about our analysts’ qualitative processes, please view our Golden Rule 3 help article.

If a company passes Golden Rule 3 from a growth perspective, it’s flagged by a gold-coloured number on our 9 Golden Rules page.

Tip: Active Risks identified by our analysts for Star Stocks can be accessed by clicking on the Active Risks tab under the Analysts Comments section.

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There will usually be approximately 30 Star Growth Stocks separated from our Borderline Star Growth Stocks. This is done by a proprietary z-score sector ranking algorithm that runs over the entire market on Golden Rule 2 – Past Financial Performance sector growth factors.

Star Growth Stocks not only pass our primary Golden Rules 1, 2 and 3 for growth but have the highest Z-Score ranking within our Star Growth Stock Group universe (made up of both Borderline Star Growth Stocks and Star Growth Stocks).

Our back testing of the z-score sector ranking algorithm has shown to add value to Star Stock portfolios over the long term. But all our Star Stocks, whether Star Growth, Borderline Star Growth or Star Income Stocks, are high-quality businesses.

Because z-score is calculated using mean and standard deviations of the sector, a company’s z-score will change every time a stock in its sector reports its financials.

During reporting season, to reduce excessive Star Growth Stock and Borderline Star Growth Stock changes/transitions, we apply z-score buffers and limitations.

Investors should note that our Star Growth Stocks will be predominantly selected on quantitative past financial metrics Golden Rule 1 (Financial Health) and Golden Rule 2 (Past Financial Performance). Hence, it’s important that investors understand the company, be comfortable with its active risks Golden Rule 3 and continue to apply our Secondary Golden Rules. Tailoring it their investment approach and stock selection further to align with your specific investment objectives and risk tolerance. 

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Star Growth Stocks may include companies that are also Star Income Stocks. It does not mean it should be given preference over other star growth or income stocks.

Investors should always understand the business, its management, and active risks before making an investment decision.

If you would like to discuss a company’s Star Growth Stock status, members can contact our Research team via email at support@lincolnindicators.com.au or speak to the team directly on 1300 676 333.