In the first half of 2018 I developed a new approach for my fundamental analysis of stocks: the Momentum Growth Quotient (MGQ). The MGQ is the key metric that I use to gauge the financial health of a company and its potential future growth prospects. The MGQ is calculated using the following company financial data:
- EBITDA growth trend over the last 10 years
- Operating Margin %
- Operating Margin % 5-year average
- Normalized free cash flow over the last 7 years
- Forward P/E
- Forward Rate of Return
The goal is to generate a single number, which summarizes the relative fundamental strength and future growth prospects for a company compared to an index. For the index, I use the S&P 100 - this index provides a wide swath of companies from different industries representative of the broad US economy. I update the Momentum Growth Quotient for the S&P 100 every month and then use the average quotient as my baseline to compare the relative financial strength of individual companies.
As of the end of July 2018, the average MGQ for the S&P 100 was 10.04. So, if a company has an MGQ of 12.00, its individual future growth prospects are around 20% higher than the index. If a company has an MGQ of 8, its future growth prospects are around 20% lower than the index.