Warren Buffett, one of the richest men in the world, once said about the value and quality of companies –
It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
Quality companies have characteristics that keep the business growing while protecting it from becoming a commodity producer that discounts to survive.
If a strong company is growing earnings by, let’s say, 20-25% annually, then it can be worth it to pay a premium price, so investors shouldn’t be scared of price/earnings ratios around 25 – 30. During market sell-offs when those PE ratios get crushed down to the teens or low 20s, the company itself may not change that much. That’s when you can increase your position at a wonderful price.
With that in mind, here are three stocks that combine both growth and quality.
SEEK Limited (ASX: SEK) dominates the online jobs listings business in Australia, attracting the most employers and applicants to its seek.com.au website. Revenue and earnings growth have been strong over the past four years and FY 2014 looks to be following suit with underlying net profit up 29% in the first half.
CSL Limited (ASX: CSL), the biopharmaceutical company that develops products and treatments for viral, bacterial diseases and blood disorders has created a strong market presence in Australia, yet gets most of its revenue from the U.S. and Europe. Some analysts project its earnings to increase over the next few years at a good pace, matching its past five-year growth trend.
Ramsay Health Care Limited (ASX: RHC) may not have the high profit margins of the two above, but it makes up for it in growth. The private hospital operator has been acquiring hospitals and medical facilities both domestically and internationally in Europe and South East Asia.
It also develops its existing facilities to increase surgery and bed space to maximise their revenue potential. Underlying net profit has increased annually in the last eight years. Growth into China is one of its objectives because of the high population and health care demand.