Many of the best long-term investors focus on what an ordinary person would call ‘defensive’ investments.
That is, they don’t go chasing ‘the next big thing’ in technology, small start-up companies or even penny stocks with sky-high potential.
Instead, they work diligently to find companies which consistently and sustainably grow revenues by 3% or 4% per year and maybe even pay a sensible dividend.
These companies usually have competitive advantages, competent management teams and established brand names.
Sigma Pharmaceuticals Limited (ASX: SIP) is the name behind Amcal, Amcal Max, Guardian Pharmacy’s, PharmaSave, Discount Drug Stores and more. Between 2006 and 2010 Sigma’s share price fell from over $3.00 to just $0.38 before sweeping changes were made to the business.
Now, Sigma’s management is reaping the rewards for its hard work, with the company’s share price rising 92% since the beginning of 2011. Although no dividend was declared in the most recent half (due to a lack of franking credits), management hasn’t wasted time in returning excess funds to shareholders and bought back more than 1.4% of issued shares in the six months to July 2014.
Despite competition from rival wholesalers, independents and privately-owned chains such as Chemist Warehouse, Sigma’s management has continued to recognise industry trends and increase profitability. Indeed, in the past few years underlying return on invested capital has increased considerably (currently around 14.6%) and working capital has dropped, making it more efficient.
Cochlear Limited (ASX: COH) is a name well known in medical circles. This is a result of its commitment to quality and service. However, the company may be facing-off with increased competition, particularly from the likes of low-cost Chinese manufacturers.
But the healthcare industry is a unique one, in that most people are willing to pay up for peace of mind. In the past couple of years Cochlear’s share price was hit hard by a recall on its Nucleus CI500 series implants, which created a sound long-term buying opportunity for savvy investors.
With the company now moving onto the latest Nucleus 6 range of devices, the future is looking brighter. Selling in over 100 countries, not only will Cochlear benefit from increasing sales, it’ll also benefit from a lower Australian dollar. 90% of Cochlear’s sales are in foreign currencies as well as 50% of costs.
Lastly, Westpac Banking Corp (ASX: WBC) is a hugely defensive business, with massive shares of Australia’s mortgage and household deposit markets. Its revenues are sticky and its multi-brand strategy has worked wonders for long-term shareholders.
It owns St.George, BankSA, Bank of Melbourne and RAMS. It also holds a significant proportion of shares in listed asset manager, BT Investment Management Ltd (ASX: BTT).
Unlike some of its rivals, Westpac derives almost all of its profits from Australia and New Zealand. However recently it has begun to focus on opportunities arising throughout Asian markets, in particular trade flows to and from Australia.
Buy, Hold, or Sell?
Sigma Pharmaceuticals is certainly reinvigorating itself, but it has a number of challenges ahead. But, given how much regulation surrounds the pharmaceutical industry, I like to think of pharmacies as retailers who provide non-discretionary products. So they’re much more defensive than most other consumer-facing businesses. However I think the current price is closer to fair value than a bargain.
Cochlear is certainly an enticing turnaround story moving forward and could reward shareholders in the long run. However its share price appears quite demanding and if it does not live up to analyst expectations it could be sold off heavily. I’m waiting on the sidelines for now.
Over the years Westpac has certainly proven to be an impressive investment, but moving forward I don’t think it will be. With a broader slowdown in the domestic economy, property prices high and debt levels at record levels, I think investors have priced historical growth rates into its share price. Indeed, at today’s prices it is certainly one I’ll be leaving on my watchlist.
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Motley Fool Contributor Owen Raszkiewicz has no financial interest in any of the companies mentioned in this article.