When it comes to financial performance, we follow the advice of those professionals who say the most important measures are return on capital, the ability to deliver profits in hard cash rather than as a notional figure that derives from complex accounting techniques, and low debt. 

The best growth comes from those companies that can produce these high cashflows from their assets and then reinvest that money in new assets at similar rates of return. Any business that can do this reliably over the long term will deliver a strong compounding effect and should reward shareholders handsomely.

The only instance where such a company will not deliver for shareholders is when the shares were bought at too high a price. As a valuation yardstick, we will look at the much-loved price-earnings (p/e) ratio.

Among the professional investors who focus on return on capital, cash generation and low debt are Terry Smith of Fundsmith, Nick Train of Lindsell Train, Sebastian Lyon of Troy Asset Management and Hugh Yarrow of Evenlode.  

Mr Smith founded Fundsmith and has a large stake in his flagship Fundsmith Equity fund, while Mr Train co-founded the firm he works for and has a multi-million-pound holding in the Finsbury Growth & Income investment trust, which he manages.

Mr Lyon has a similarly large stake in his Personal Assets investment trust. The family of Hugh Yarrow, manager of the Evenlode Income fund, owns a large slice of the management company.

All can therefore be said to have significant “skin in the game” – and all four of the portfolios mentioned own a stake in today’s tipped share, 

David Fuller's view

However persuasive the argument, I would not want to buy a share shortly after it was tipped by a well know newspaper, especially if it looked temporarily overextended. 

The UK’s Sage Group has certainly been a fast growing tech company for a number of years but it is temporarily overextended relative to its 200-day (40-week) moving average.  Every other time this has occurred we have seen mean reversion to at least the MA, and often temporarily below it prior to 2015.  Therefore, if you are looking to add a promising tech company to your portfolio, I would wait until we have seen at least a test of support from the rising MA. 

Here is a PDF of The Telegraph article.