When trying to identify long-term outperforming stocks, there are many different factors a potential shareholder must consider.
For example, seasoned professionals will advise their clients to pick companies with competitive advantages and strong cash flows. Two characteristics which I believe are vital to any share market investment.
That's because having a competitive advantage provides a great level of safety around a business model and enables a firm to continually grow revenues. Free cash flow gives managers the opportunity to invest and grow a business, as well as pay dividends.
Three S&P/ASX200 Index (INDEXASX: XJO) stocks with competitive advantages and scale are Macquarie Group Ltd (ASX: MQG), Coca-Cola Amatil Ltd (ASX: CCL) and Woolworths Limited (ASX: WOW).
Macquarie Group is Australia's premier investment bank and is heavily exposed to foreign markets, such as those in North America and Asia. In the past two years, shares in Macquarie have rallied as profit from these regions took off. Although Macquarie is a cyclical business, its specialist knowledge in niche market areas affords it an advantage over its peers and provides scope for long-term outperformance. I don't own shares in the bank just yet because I know the best time to buy banks is during credit crunches. However, I'll admit there is a bull case to be made for Macquarie in the short term.
Coca-Cola Amatil ("CCA") is a solid defensive business with a competitive advantage which is second to none. With exclusive rights to distribute The Coca-Cola Company's range of products to six countries (including Indonesia), the long-term growth prospects for the company appear good. However a price war with rival Schweppes and between supermarket giants Coles – owned by Wesfarmers Ltd (ASX: WES) – and Woolworths isn't helping its operations and has had a negative impact on CCA's share price. Despite this, I believe the long-term fundamentals for the business remain intact and it now could be an ultra-long-term buying opportunity.
Woolworths, as mentioned above, operates in a near duopoly with rival Coles. With a very efficient supply chain and growing store count, Woolworths' successful growth strategy has been reflected in its 200% share price appreciation over the past decade. However I'm not so enthusiastic about its current price and future growth prospects. Unfortunately for the two supermarkets' shareholders, the Australian market isn't growing quickly enough to replicate its past results and the introduction of rivals Aldi and Costco who have, in my opinion, superior services won't help. I'll admit the Masters home improvement chain is a viable long-term growth strategy but with Woolies shares trading on a PEG ratio of 3.83, it's hardly a bargain at today's prices.
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