Business Times December 13, 2006 ? S is for stock ?picking, the S-Curve way by Clemen Chiang, CEO of Freely Pte Ltd

A proven strategy for selecting great companies is by studying the S-Curve of stock charts. The S-Curve helps you to achieve a broad perspective of the four phases in the life cycle of a company, and understand how great companies create new S-Curves in a planned manner.

Initial Phase

The initial years involve a lot of hard work. Many companies suffer a great deal during this initial phase. The company is generally participating in perilous business as its primary concern is raising sufficient funds to engage in early-stage research and development.

The initial phase usually lasts not more than 5 years. The company is operating on a shoestring budget, while at the same time presenting to the world a product or service that is yet to be accepted. Companies which are able to withstand the pressures of the initial years slowly enter the second phase, namely the growth phase.

Growth Phase

The company is able to survive the shocks of the first few years, stabilise and grow rapidly, capturing new markets, introducing new products and making new investments. This growth phase is characterised by rising demand, greater predictability in market demands and technology and entry of competition. The company will eventually begin to lower prices in response to competitive pressures and the decline of costs of production, often referred to as economies of scale. However costs decrease faster than prices do. As such, the company experiences growth in profits as its products and services become fully accepted in the market place. The ideal time you should invest in great companies  is during the growth phase due to their ability to sustain growth in revenues and profits over long periods of time.

The growth phase is marked by these distinguishing features :

·         Stock split announcements increase significantly

·         Earnings announcements is beating consensus consistently

Mature Phase

In the mature phase, the company stabilises its operations after a lucrative period of growth. This is marked by low market growth, relative stability in technology, intense competition and imbalance in capacity related to business cycle. During this phase, things tend to slow down, sometimes with an emphasis on increasing profit rather than achieving growth. Price competition forces the company to explore other areas for potentially higher margins.

As an investor, you should continue to keep your investments in companies entering the mature phase because they are able to withstand economic downturns and recessions better than companies in the growth phase. The mature phase is marked by three distinguishing features :

• Stock split announcements reduce significantly
  
  
• Earning announcements beating/missing consensus inconsistently
  
  
• Dividend payout
  
  

Decline Phase

The last phase in the life cycle of a company is one of fatal decline caused by new competition from aggressive players. The decline phase is marked by three features :

• Stock split announcements discontinue
  
  
• Earning announcements missing consensus consistently
  
  
• Stock chart moving downward
  
  

By studying the S-Curve closely, you have a proven strategy for selecting great companies. This is the common denominator employed by all great investors