If your long-term goal is to beat the market return with a growing portfolio, there are a couple ways of doing it. Although the S&P/ASX 200 Index (ASX: XJO) (Index: ^AXJO) has gained about 7.6% over the past year (thanks to decent rise in January), the ASX long-term average return is about 11% annually.
First, focus on companies that have high profit margins. When a company has a higher percentage of revenue left over after paying for everything- including investments back into the business – they have an opportunity to build up cash or push on with more business development.
Secondly, look at a company's 5 and 10-year earnings record. A very successful company should show steadily rising earnings. If there is a year when earnings dropped out of character, there may have been a short-term situation that has been taken care of. However, multiple falls and earnings per share seesawing up and down mean you can't really rely on the stock. If you want consistently high returns, you need consistently high performers.
— Slater & Gordon Limited (ASX: SGH) has that steady, uptrending earnings history of a quality company. The law practice company usually has a net profit margin of around 14% – 15%, which is above average. Slater & Gordon operate nationwide and is growing strongly in the UK market for personal injury law service.
— REA Group Limited (ASX: REA) is a consistently high profit margin company. The operator of realestate.com.au, Australia's number one property search website, makes good profits. As the market leader, it can command a premium for its services. In financial year 2014, REA Group had a 34% net profit margin, in line with previous years. In the past four years, net profit has doubled. The stock fits the two conditions above easily.
— ResMed Inc (CHESS) (ASX: RMD), the producer of sleeping aids and respiratory devices, has risen 15.4% in share price within the last month, partly on the news of the company posting a 10% gain in quarterly sales and 5% rise in earnings. The US healthcare market where ResMed operates predominantly has great opportunities for expansion. Sure enough, it has a long track record of steadily rising earnings and in financial year 2014 achieved a 22% net profit margin. A lower Aussie dollar could even make ResMed's US$ denominated earnings bump up by conversion, so there may be more to look forward to.
