Borderline Star Growth Stocks (green stars) rank outside of the Star Growth Stocks universe and can be used to help diversify a portfolio to alternative high-quality growth stocks depending on risk profile and preference. Like Star Growth Stocks, these are regarded as high-quality growth businesses that suit investors who seek capital appreciation over the long term.
Borderline Star Growth Stocks (BSGS) are identified via Lincoln Indicator’s proprietary quantitative methodology and qualitative assessment.
New Borderline 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
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).
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.
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 growth stocks' true fundamental quality and investment potential. Click here to learn more about the factors we use in each sector model.
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.
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 are 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.
Borderline Star Growth Stocks rank outside of the approximately 30 Star Growth Stocks. This is done by using our proprietary application of the Z-Score ranking, to allow appropriate diversification of stocks across three sectors – industrials, financials, and resources.
The Z-Score is Lincoln Indicator’s ranking algorithm that runs over the entire ASX market on Golden Rule 2 – Past Financial Performance growth factors – following the release of companies’ financial results.
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 can use borderline Star Growth Stocks to broaden their spread of quality businesses beyond Star Growth Stocks, as they still meet the key financial characteristics of a quality and growth business and pass all three of our primary Golden Rules for Growth.
Investors should note that our Borderline 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, investors need to understand the company, be comfortable with its active risks Golden Rule 3 and continue to apply our Secondary Golden Rules. Tailoring their investment approach and stock selection further to align with your specific investment objectives and risk tolerance.
Borderline 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 Borderline Star Growth Stock status, members can contact our Research team via email at firstname.lastname@example.org or speak to the team directly on 1300 676 333.