What are the hallmarks of a great company? Its a deceptively simple question, the answer to which is likely to depend on the investment strategy of the person its put to. Nevertheless, there are some things I think we, as Foolish investors, would all agree are desirable.
Defining greatness
The firstquality investors should have on their listis a companys ability to provide a product or service that its customers cant do without or are willing to pay more for even if cheaper alternatives exist. For instance, the user-friendlinessof its devicesand sensitivity to offering consumers what they want has propelled Apple to the very top of the treein terms of market capitalisation.Despite recentlyscoring something of an own goal through its very publicspat with Tesco, Unilever would be another example thanks its massive portfolio of sticky brands that customers desire.
A second characteristic could be a companys potentialto grow to a very large size. Here,in-demand premium mixer producer, Fevertreewould be a relevant case study.Since listing two years ago, shares have shot up by over 600% and, if analyst estimationsprove accurate, there couldbe furtherupside left to come. This is why it can pay to look for opportunities further down the market spectrum. By recognising their potential early on, investors can make serious amounts of money.
Otherthings to look out for are companies that are able to achieve high operating margins and invest capital at a high rate of return. Those that can do soconsistently should see earnings grow many times over which, in turn, should drive the share price higher. British engineer,Victrexticks bothof these boxes, in my opinion.
One final characteristic of a great company isitspotential to endure for decades. This is one of the reasons why, in addition to chasing pharmaceuticals and utilities, many long-term investors have piled their cash intoSirius Minerals. Since its planned polyhalite mine in North Yorkshire will haveanestimated life of 100 years, this could be one share that keeps on giving.
Does price matter?
At this point, however, we encounter a problem. Even when they do find a company that satisfies all of the points above, some investorsmay be disinclined to snap up the shares because theyre seen asexpensive ontraditional measures. They might arguethat Fevertrees price-to-earnings (P/E) ratio ofaround 50 or even Unilevers P/Eof 20are just too high.
I think this is a mistake. As Warren Buffett said:Its better to buy a wonderful company at a fair price than a fair company at a wonderful price. In other words, basing investment decisions moreon the price were being asked to pay andless onthe quality of the companyis dangerous, particularly as many businessestrade on temptingly cheap valuations for a reason.
Whats
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more essential, in my view, is recognising the fact that a great company can become distinctly average over a relatively short time if the storychanges. This is why investors need to keep an earout for any stock-specific news relating to companies they own and resistfalling in love with a particular share. Ifthe reasons for investing no longer apply, its time to move on.
Paul Summers has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
