Finding quality stocks on the Australian Stock Exchange (ASX)

For many of us, it feels like we’re living in uncertain times.

Every day, we face more social, economic, and political disruptions. For investors, it can be alarming.

During times like this, everyone has an opinion, and it’s fair to say there’s more noise around the markets than ever before.

Arguably, objective analysis and facts have never been more critical for investors looking to navigate the stock market.

With the right tools and guidance, there has never been a better time to invest in the stock market.

In our opinion, there are three Primary Golden Rules to consider when trying to identify some of the best quality stocks in the Australian Stock Exchange (ASX) for growth and income.

Primary Golden Rules:

Golden Rule 1: Financial Health

Golden Rule 2: Past Financial Performance

Golden Rule 3: Outlook and Active Risks

These three rules are the core pillars of our high-conviction stock selection strategy. They focus on high-quality stocks with robust fundamentals rather than opinions and speculation. Financial Health remains the cornerstone of our approach and fuels our pursuit to invest in the numbers.

Golden Rule 1: Financial Health

This fundamental principle encapsulates the thorough due diligence that investors need to undertake on a company’s financial position before investing.

Put simply, you should analyse companies’ financial accounts and calculate industry-specific profit, debt, asset, equity, and cash flow ratios.

Since its inception in the 1980s, our Financial Health Model has had an approximately 95% success rate of identifying corporate failures before they occur.

Golden Rule 2: Past Financial Performance

Our research has shown that a company’s track record and past performance metrics can be a reliable indicator of its future performance.

When combined with Financial Health, Past Financial Performance is an essential quantitative barometer to help further measure the true fundamental quality and investment potential of growth stocks and income stocks.

Golden Rule 3: Outlook and Active Risks

Lastly, to overcome the potential for backwards-looking bias, you should also consider Outlook and Active Risks, what we call Golden Rule 3. This is to ensure a company can maintain its Past Financial Performance.

This involves a qualitative analysis of the company, its outlook, and potential risks.

Consider investigating trends in earnings revisions, a company’s competitive landscape, directors trading activity, currency and commodity risk, management remuneration, trends in short selling, regulatory and geopolitical risks.

It’s important to note that significant active risk may impact a company’s ability to remain financially healthy or jeopardise its past financial performance (Golden Rule 2) compliance. Therefore, it may put its ability to deliver on the needs of growth or income investors at risk.

The three Primary Golden Rules provide the core framework for investors to build a high-quality, financially healthy portfolio for capital growth or to provide a sustainable dividend stream. From this process, our portfolios of Star Stocks for growth and income are created.

The Secondary Golden Rules are then used to tailor these stocks to an investor’s own personal preference, tolerance to risk, style, and investment goals. Not all secondary Golden Rules will be relevant to every investor. Proactive investors are encouraged to use a combination of these rules to help refine their own stock selection strategy.

At Lincoln Indicators, our quantitative data-driven methodology has identified some of the best quality stocks to buy – what we call our Star Stocks for growth and income. Get a free copy of the Golden Rules white paper to understand this investment framework further.

If you would like to see our Golden Rules in action and view some of our Star Stocks, start a free trial to Stock Doctor today.