The truth about investing is that you don't need to hunt out the year's greatest 'growth' company to be successful.
In fact, unless you have access to information that other investors don't, the time and effort required to uncover the 'next big thing' is probably a waste of energy.
Success can be made a lot simpler by going back to what works: buying solid, un-sexy companies at decent prices. The growth of these companies often looks unremarkable on an annual basis; 7% here, 8% there… maybe a 3% dividend, but when you look back in 10/20/30 years, the incredible power of compounding can result in a staggering accumulation of wealth.
These companies are easy to overlook, but given their long term potential they deserve to be highlighted.
One of my favourites, although not technically a company, is the iShares Global Consumer Staples ETF (ASX: IXI) – an exchange traded fund. The fund holds some of the world's biggest consumer brands which earn bundles of cash and can easily pass on price increases to consumers, compounding returns year, after year, after year.
Breathing device manufacturer ResMed Inc. (CHESS) (ASX: RMD) is in a similar position. The company has grown earnings per share at a compounded annual rate of 11.4% over the last five years and supported by a long-term growing healthcare market and regular reinvestment in research and development, the company still has a long way to go, while selling for an attractive price.
Like ResMed, utility software company Gentrack Group Ltd (ASX: GTK) sells for a very reasonable price (19x trailing annual earnings), and has grown EBITDA (Earnings Before Interest, Tax Depreciation and Amortization), at an annual compounded rate of 10.9% over the last five years. In addition the company currently pays an attractive 4.5% dividend. The company expects EBITDA in 2016 to be flat, but revenue growth is anticipated around 10%.
Finally, blood product company CSL Limited (ASX: CSL) is another company resilient to broad consumer economic cycles and an absolute compounding star. Not only does the company earn completely ridiculous returns on equity, over the last five years the company's share buy-back program has pushed earnings per share up at a compounded 19% per year!
CSL looks more expensive relative to annual earnings, but with a history of staggering returns it's easy to see why investors are willing to stump up a premium for the company.
