Through research and my own investing career, I have come to realise that all companies are not made equal. There are over 15,000 tradable stocks across the different markets and I think only about 80 companies are worth investing in for the long-term. I have crafted a master list of these stocks by following a number of key criteria. For a company to be on that list, it must posses the following characteristics.
- Long Track records of sustained profitability, high free cash flows and increasing dividend payouts. Many of the companies on this list have increased their earning per shares for the past 30 years. I have a strong feeling that they will continue to do so for 30 more.
- Excellent business models. This is highly subjective but what I like to see from a business is the ability to sustain a high return on operating capital employed.
- Durable Competitive Advantage. The business has to have a durable competitive advantage or economic moat. I like businesses whose assets are intangible and difficult to replicate. A company like Visa has a competitive advantage in that it is only one of two companies (master card) that control the ‘financial networks or real estate’ in which electronic payments are processed. A company like Nestle for example has a competitive advantage in the milk market in India as it ‘controls’ the distributable network. Each and every company on the list has a competitive advantage of some sort. If a business has a competitive advantage, it breaks the rule of mean reversion and thus can earn super-normal profits over the long-run. I measure the durability of the competitive advantage partly by analysing margins over a long period of time (10-20 years) in addition to evaluating the components of the competitive advantage qualitatively.
- Low leverage. Apart from the oil companies, the list contains company that have low leverage / debt. A sign of an excellent company is that it earns a high return on their capital on an unleveraged basis. Financial companies for instance earn a low unleveraged return on their capital and that is one often reasons they are not on the list.
- Growth potential. A business must be able to reinvest at least a portion of its excess cash flow for future grow, while generating a high return on the cash. In doing so, shareholders’ wealth is compounded by generating more than a pound of stock-market value for each pound reinvested.
- Resilience. A business must have resilient products. This means that I generally do not invest in industries which are subject to rapid technological innovation. Studies have shown that sticking to the tried and tested yields better results over time than investing in fads. The company must have clear revenue and earnings visibility. Can I reliably predict what the earnings will be five years from now? There are certain industries that have predictable earnings streams and these are the ones that have produced the highest returns over time.
- Competent management – The importance of a strong management team cannot be understated, however this is something that is not easy to evaluate. I look for things like shareholder friendly policies, limited shares outstanding growth, experience and tenure with the company, and overall competence. This can also be evaluated through the Scuttlebutt Method
If you would like this master list of stocks, simply email me on firstname.lastname@example.org or use the contact page found on this website. As well as containing the best companies for intergenerational wealth, my list has my own target price for each stock which once reached, I place a buy order. The cost for this master list of stocks is £45.