MENU

3 traits I look for in the best ASX shares

In my opinion, it’s easy to see why shares of Pro Medicus Limited (ASX: PME), CSL Limited (ASX: CSL) and XERO FPO NZ (ASX: XRO) are soaring.

By the same logic, it’s easy to see why companies like BHP Billiton Limited (ASX: BHP) and AMP Limited (ASX: AMP) continue to be dogs.

3 traits I look for in the best ASX shares

Just like people with Jack Russell’s or Dachshunds (eww, small dogs), I think every share portfolio should be a reflection of the person who owns it.

“Did you see Jason? He owns AMP shares. Ha, he must not like beating the sharemarket!”

Now, I’m not saying you need to own a ‘pretty’ or ‘popular’ portfolio to define yourself. You’ll soon end up in a doghouse of your own by doing that.

But as long-term investors we are — and will be — nothing, if not consistent with our strategy.

Here are three things that I look for in ASX and international shares.

Management

If you don’t know who is in control of the company which you own (as a shareholder), well… (how do I put it politely?) stop investing, you need professional help. Whenever we buy shares on the sharemarket, what we are implicitly saying to the company is this:

“Here you go, Mr Manager, take my money. I think you can invest it better than me.”

Otherwise, just stick it in the bank.

I look for managers with ‘skin in the game’. That is, they must own heaps of shares in their own company. Founder-run companies and those owned by a family are even better. Pro Medicus and Xero are prime examples.

Capital-light

If you can find a business that invests small amounts of money for a big amount of revenue, it will produce far better returns than a business that eats lots of capital to produce a return. For example, compare the profit margins of Pro Medicus, a medical software business, to AMP, which sells mostly commoditized financial products and services. For every extra dollar of revenue Pro Medicus generates from selling its software, more money falls to the bottom line (profit).

Recurring revenue

If you look at big construction companies, their margins are terrible. These businesses are not capital light (see above), but their revenue is also not very consistent.

Ultimately, you want wide profit margins and repeat customers. CSL is a great example. It creates life-saving vaccines. Imagine if its customers stopped paying for its products!

Foolish Takeaway

Build a portfolio you are proud of. That doesn’t mean being popular and following the herd because it’s easy, but being able to define your strategy and tell people why it will work.

The Motley Fool's #1 Dividend Pick for 2017

With its shares up 96% in just the last five years, this 'under the radar' consumer favourite is both a hot growth stock AND our expert's #1 dividend pick for 2017. Now we're pulling back the curtain for you... And all you have to do to discover the name, code and a full analysis is click the link below!

Simply click here to receive your copy of our brand-new FREE report, "The Motley Fool's Top Dividend Stock for 2017."

Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any company mentioned. Owen welcomes and encourages your feedback. You can follow him on Twitter @OwenRask.

The Motley Fool Australia owns shares of Xero. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.