Quality company/stock: How do you determine that?

[It's Snake Pliskin]

Another investment criteria term that should be considered is if you think the business knows their product and knowing who the people are that will want it. Certainly for consumer discretionary stocks this is vital. Good monopolies/duopolies evolve due to this focus alone. Competitors who don't focus on this usually wither and die.

Usually companies who are active in searching out feedback from clients about how they could improve their product do well. Marketing is one thing, R&D is a totally different ball game.

Good point brought up. And to what extent are governments helpful to those duopolies/monopolies/oligarchies?

 

[It's Snake Pliskin]

A growth company is a company that has the ability to reinvest all or a portion of it's earnings back into the expansion of it's businesses and there for grow earnings which over time should see a rising share price.

The Value approach becomes even more important when heading into "growth" companies, because often companies labelled as growth stocks already trade at prices much higher than their current asset value. So before you buy you have to find out the details such as

what is the current equity?
what is the current return on this equity?
how much of the of earnings are reinvested?
will these reinvested earnings earn the same return as preivious reinvested equity?
what is the premium above current conservative valuation?
Is the company likly to grow earning fast enough to warrent paying a premium?

When you invest in a growth business you need to have a firm understanding of what you are buying and how much more are you paying for the prospect of future earnings growth.

Thanks Tyson,
What wording would encompass quality considering what has been stated above? As far as growth and valuation it's clear.

Keep it simple and have fun it does not have to be so complicated.

For practical reasons and implementing strategy I totally agree.

Discussion can be philosophical and debatable like how one determines quality.

 

[Tysonboss1]

Opportunity cost is a consideration so I feel languishing price is a problem for investing in the short to medium term - which will vary from person to person. Falling price is obviously an issue of opportunity cost.

Wheres the oportunity cost if your buying a company that is paying 11% dividend, you have the staying power to sit in that investment for as long as it takes to see a capital gain that brings it's dividend back to 8%.

there is a big opportunity cost in ignoring great business at low prices just because the market is shunning them, and chasing the latest hottest stock that just happens to be trading at giant mulitples because the market believe's their future growth is huge.

think tech boom, and the 2003 - 2007 idiot boom,

 

[So_Cynical]

While on the subject of quality stock picking (this could probably go in the contrarian thread too) i noticed just today that Orbis funds have again increased there holding in APN (one of my open trades) and so i decided to do a little snooping at there site and found the quarterly reports section made for some interesting reading.

They go into quite some detail as to why they are buying into XYZ and i thought it could offer some insights for ASF members into there very successful stock selection and position management strategy's.

Reading back over the quarterly reports its clear that Orbis have made some great calls and thus picked some great stocks at low points in there price cycles...including
coincidently 4 of my portfolio stocks APN, HDF, ALZ and ILU.

Latest Orbis quarterly http://www.orbisfunds.com.au/reports/SMEF-QuarterlyReport2010Q4.pdf

Quarterly reports page http://www.orbisfunds.com.au/smef/reports.aspx

 

[skc]

While on the subject of quality stock picking (this could probably go in the contrarian thread too) i noticed just today that Orbis funds have again increased there holding in APN (one of my open trades) and so i decided to do a little snooping at there site and found the quarterly reports section made for some interesting reading.

They go into quite some detail as to why they are buying into XYZ and i thought it could offer some insights for ASF members into there very successful stock selection and position management strategy's.

Reading back over the quarterly reports its clear that Orbis have made some great calls and thus picked some great stocks at low points in there price cycles...including
coincidently 4 of my portfolio stocks APN, HDF, ALZ and ILU.

Latest Orbis quarterly http://www.orbisfunds.com.au/reports/SMEF-QuarterlyReport2010Q4.pdf

Quarterly reports page http://www.orbisfunds.com.au/smef/reports.aspx

Thanks for the link S_C. They made a call on a company that I'd never thought of investing... might have to do a bit of research on that call.

 

[So_Cynical]

Thanks for the link S_C. They made a call on a company that I'd never thought of investing... might have to do a bit of research on that call.

I'm with ya...ive just spent the last 2 hours looking at stocks that i have never considered, in fact some stocks i had totally dismissed...and as a result have added a couple to the "keep an eye on" watchlist.

 

[StumpyPhantom]

Hey Snake - P,
Thx for starting this thread - I've thoroughly enjoyed reading the contributions. As a recent convert to Roger Montgomery, I agree with the rational analysis of IV and the broad distinction being made between 'quality companies' and 'quality stocks'.

As someone who was lucky enough to buy my first stock in late Oct 2008, and who went crazy on 21 Nov (the first low point), buying things like WBC @ $14 and BHP @$20, timing the market has been very good to me. The second low hit in March 2009 and it's been vageuly up ever since, so I'm know concentrating on time in the market, paying off the margin loan, and 'rationalising' my holding.

So this rationalising is where I come in to contribute to your thread, and Roger's been a great help here. IV analysis aside though, nothing gets the blood running like a 40% rise in one day, and this is where the RHS of the brain comes in.

By all means, use the LHS to house a stable of quality companies. But so far as the 'rush' is concerned, that comes on when somebody is being taken over, or somebody has made a discovery. As Roger says, neither the 'takeover/discovery' premium is anything to do with IV, but you wouldn't mind walking away with a 40% increase just the same. I've been lucky with this in the last couple years - LNN, ROL, DOM

So if anybody reading this can help with the RHS rush (ie possible takeover targets or explorers heading for a discovery), in a year where everyone is talking up the lazy cash of big companies and the resources boom needing new finds, then I would love to read your suggestions.

Mine? PDN, IOH, NDO, WOR....

 

[prawn_86]

So if anybody reading this can help with the RHS rush (ie possible takeover targets or explorers heading for a discovery), in a year where everyone is talking up the lazy cash of big companies and the resources boom needing new finds, then I would love to read your suggestions.

Heaps of other threads for this, please do a search for takeover targets in order to keep this thread on track.

Thanks

 

[It's Snake Pliskin]

Wheres the oportunity cost if your buying a company that is paying 11% dividend, you have the staying power to sit in that investment for as long as it takes to see a capital gain that brings it's dividend back to 8%.

there is a big opportunity cost in ignoring great business at low prices just because the market is shunning them, and chasing the latest hottest stock that just happens to be trading at giant mulitples because the market believe's their future growth is huge.

think tech boom, and the 2003 - 2007 idiot boom,

What if the dividend reduces as with capital gain even though it is a quality company?

I'll have to continue with this in a couple of weeks when I get back from traveling.

Cheers..

 

[Tysonboss1]

What if the dividend reduces as with capital gain even though it is a quality company?

I'll have to continue with this in a couple of weeks when I get back from traveling.

Cheers..

These are the things you assess as part of your analysis, which greatly reduces the risk there of.

Along with some basic diversification the stratergy is one of the lowest risk stratergies.

Buying quality businesses at sensible prices is always over time going to have better results than heading into unchartered waters of overpaying for expected future growth.

There is actually a stockmarket truth, that some of the best growth businesses make terrible investments simply because they always trade at amounts much more than thier current value. Sure their are situations where growth companies should get a premium in price because of the earnings growth that will happen.

But often these companies trade at prices that rely a 5 years of strong growth and if that doesn't happen or the growth is slightly less than expect then they will suffer falls in share price allong with you accepting less yield because you over payed so much.

If fact with these sorts of stocks, the company has to have massive growth just for you to have mediocre returns.

Strong growth in the business does not relate to strong returns to share holders unless you didn't over pay in the first place.