Real-world money management experience has taught us that growing companies exhibiting the following characteristics will consistently generate alpha:

  • Cash Flow – both operating and total cash flow;

  • Market Share – At least holding current share and preferably gaining share;

  • Management Execution – meeting both its own and Street expectations.

Consider cash flow and market share. Clearly, a company can often have one without the other. And a company can actively trade one for the other. Management can cut prices in order to gain unit share. Or they can cede a less-profitable industry segment to encroaching competitors in order to preserve the profitability and cash flow from the balance of its businesses.

But companies that can simultaneously maintain or grow cash and market share outperform as both companies and stocks. Increasing market share leads to economies of scale, as ever-larger purchasing power reduces unit costs, and marketing costs are reduced because there are fewer, less-powerful competitors. Increasing cash flow builds cash reserves to handle economic downturns and to make strategic acquisitions possible, thereby increasing market share.

So where does management execution fit into this analysis?

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