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Golden Rule #3 - Outlook / Active Risks

To overcome the potential for backwards-looking bias and determine whether a company can maintain its Past Financial Performance (Golden Rule 2), all Star Stocks are also required to meet Golden Rule 3 Outlook and Active Risks, a qualitative analysis of the company, its outlook, and specific active risks are required.

The analysts at Lincoln Indicators constantly monitor the Outlook and Active Risks of Star Stocks to ensure that they are investment grade. The analysts will investigate trends in earnings revisions, its competitive landscape, directors trading activity, currency & commodity risk, management remuneration, trends in short selling, and regulatory & geopolitical risks. To do so, the analysts will scrutinise consensus forecasts, speak to company management, attend investor briefings, analyse broker research and monitor sector trends.

Though a company may be financially healthy (Golden Rule 1 – Financial Health) with good management that possesses a strong track record (Golden Rule 2 – Past Financial Performance), can they continue to maintain it into the future?

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.
They perform their quantitative assessment by investigating:

  • Earnings revisions – have there been upgrades or downgrades to consensus forecasts in recent months. Usually, changes in earnings forecasts drive share prices.
  • Abnormal events could suggest recent profits are unsustainable. For example, driven by acquisitions or government stimulus measures
  • Changing competitive and structural landscape that can lead to margin pressure
  • Director ownership and trading activity
  • Trend in short selling
  • Management credibility
  • Commodity price and exchange rate sensitivities
  • Regulatory and geographical risks

A significant active risk may impact a company’s ability to remain financially healthy or jeopardise its Golden Rule 2 compliance and therefore put it at risk its ability to deliver on the needs of growth or income investors. This would see the company lose its Star Stock status.

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

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Consensus analyst forecasts shown under Golden Rule 3 are based on a median of third-party analyst forecasts. The number of research houses that provide analysis for the company is displayed in the top right corner. 

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Under the Analyst Comment Section

h.pngStrategic comment is provided for all ASX listed stocks delivering informative insights to help make tactical investment decisions. We provide detailed expert commentary on our universe of Star Stocks.

For Lincoln Star Stocks, h2.jpg Key Updates and a detailed diagnosis are provided on our Golden Rules and more.

h3.jpg Active Risks highlight the key points that need to be brought to the attention of potential and/or existing investors.

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For more information on the Golden Rules Star Stocks must meet, refer to Lincoln Indicators’ Nine Golden Rules Whitepaper.