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.
