A few days ago we talked about five traits that make an “all-star” business and why they’re important for your investments. Today, we’re identifying another seven traits to really help you pick the next winning stock.
Let’s get started…
6) All-star businesses are their own bosses. Businesses that have to constantly bow down to government pressures can be tough to invest in. This is because government can exert force or pressure on them which may increase their costs, or even block sales. Those that operate without government influence are the ones that can go unchallenged and grow to new heights. Why do you think Uber adopted a ride first, ask later strategy? Before governments could hold them back, they scaled worldwide and now are leading the race.
7) All-star businesses can’t stop growing. Companies that rely on a small, niche markets will quickly hit a ceiling. Don’t get me wrong. They can be great businesses — just not great investments. Those that appeal to the masses and continue to rebrand are those that keep on growing. The New York Times (NYT) is a great example of this. They switched to digital subscriptions and now are ready to double their number of subscribers in just 6 years.
8) All-star businesses beat their competition. You probably already know this one, but it’s good to emphasize because sometimes the most obvious advice is what we forget. Every time you hear about a potentially great stock, you should think “sure, but is it better than its competition?” If there’s another that’s going to perform better, that’s where I’m focusing. Focus on businesses that lead.
9) All-star businesses distinguish themselves. How do businesses lead the competition? By distinguishing themselves. Think about Apple’s early “Hi, I’m a Mac” commercials. They told you everything that makes them different from Microsoft (MSFT). And now a decade later, we still know that if you want a laptop that lasts forever, doesn’t diminish in value, and has ridiculous battery life, you get an Apple (AAPL).
10) All-star businesses let the cash flow with low capital expenditures. If you can make a lot of money and spend little of it on capital expenditures, you’re golden. Visa (V) is an amazing example. It spends only about 10% of its cash flow on capital expenditures.
11) All-star businesses pay consistent dividends. If a company suspends dividends, it could mean a cash flow issue. Successful companies are always looking out for their investors and they show this through dividends and buybacks. Johnson & Johnson (JNJ) is a great example, with a dividend program that’s risen for 56 years.
12) All-star businesses have profit margins above the industry average. Again, one that you should know but probably forget when you get excited about a business. No matter what’s exciting you, remember to check the fundamentals. A business making more profit than its competitors is a business with an advantage.
What You Should Do
There are many other traits that help define an “All-Star business”. But armed with these twelve, you’re in a good place to start spotting some winners.
-Investing Insider Magazine