Tuesday, July 11th, 2006
Fundamentals: ROE
Robert McIver of growth manager Jensen Investment Management in this interview says he dumps stocks when return on equity (ROE) falls below 15 per cent. “To us that is an indication of a deteriorating fundamental business position and a loss of competitive advantage.”
The Jensen philosophy, which was also outlined in a Barron’s article, is to buy companies at reasonable prices and hold them for the long term. “We’re looking to invest in high quality growth companies,” McIver said. “The portfolio managers are all seasoned business people who’ve had real world business experience and consequently, we approach investing in a way that’s unlike most other investment companies. What we’re specifically looking for are sustainable competitive advantages, a consistent and high level of business success, and growing free cash flows with shareholder-friendly management. Typically, the Jensen companies should grow their earnings at a greater rate than the market as a whole.”
Harry Domash, in an article about blogger Charles Kirk, outlined why he thought ROE was crucial. “The way the math works, a firm can’t grow earnings faster than its ROE without raising additional cash. For example, if its ROE is 15 per cent, it can’t grow earnings faster than 15 per cent annually without borrowing or selling more shares. Both of those options reduce profits to existing shareholders.”
William O’Neil also demands ROE of 17 per cent or higher.
Word Count: 224. This entry was posted on Tuesday, July 11th, 2006 at 8:09 pm and is filed under Fundamentals. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
