Some people claim that buying last year’s winners is a common investing mistake to avoid, although others claim it’s a common investing strategy to follow if you want to beat the market. The truth is neither strategy makes much sense as a rule of thumb as past performance is no guide to future returns. Share markets are forward looking and stock prices represent expectations of future performance. So to generate strong returns you need to find companies that are likely to beat the market’s expectations whether they be high or low. But it’s no use buying a dud company that…
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Some people claim that buying last year’s winners is a common investing mistake to avoid, although others claim it’s a common investing strategy to follow if you want to beat the market. The truth is neither strategy makes much sense as a rule of thumb as past performance is no guide to future returns.
Share markets are forward looking and stock prices represent expectations of future performance.
So to generate strong returns you need to find companies that are likely to beat the market’s expectations whether they be high or low. But it’s no use buying a dud company that falls less than the market expected, you’ve always got to find quality companies kicking goals on all fronts. That means sticking to the basics of strong balance sheets, outlooks, management teams and potential for consistent profit growth.
At the end of the day share prices will always follow earnings and dividends higher or lower over the long term so if you stick to the basics and buy growth oriented companies at good valuations you’re unlikely to go too wrong. In fact the odds will be in your favour over the long term.
At the moment a lot of the best businesses on the local market are trading on expensive valuations so identifying good businesses to buy today is harder than ever. Still I have five businesses below to consider.
Webjet Limited (ASX: WEB) is the online travel business guided by its impressive CEO John Guscic and what appears to be a stable senior management team. Importantly this is a business with a sound track record of meeting or beating profit forecasts, with a current forecast for full year EBITDA (operating income) of $80 million. At $12.36 it trades for 18x EBITDA and carries some debt so it’s not classically cheap, but does offer potential for consistent double-digit growth.
Ramsay Health Care Limited (ASX: RHC) is the private hospital, medical centre and pharmacy operator that has seen its share price retreat around 5% over the course of the past year on concerns its European businesses are suffering as governments look to rein in costs. Still, the group is forecasting 8%-10% earrings per share growth in FY 2018 and the share price weakness may present a buying opportunity at $63.55 for smart investors.
TPG Telecom Ltd (ASX: TPM) is the home broadband and enterprise internet provider that is founder led and has an impressive track record of growth. The market is not too keen on the business for now though due to the NBN hitting margins and big investments into 5G mobile rollouts in Australia and Singapore. The stock sells for $6.11 today and could be volatile when TPG reports its half year results on March 20.
CSL Limited (ASX: CSL) is the blood products and flu vaccine manufacturer that continues to invest heavily in developing new products for further growth. It also possesses an impressive, steady and experienced management team able to help leverage the growth in underlying demand for its healthcare products globally. Its latest trial drug CSL 112 is heading into Phase 3 trial stage and its potential success alongside the moat and strong profit growth probably justify today’s valuation of $165.94.
Twilio Inc (NASDAQ: TWLO) is a US business that is worth a look given the lack of value around on the local market at present. Twilio is a market leader in the online communications space and is growing its sales in the US and Europe at impressive rates. The valuation of US$40.40 reflects the fact that this business does not have the strongest moat nor the highest gross profit margins versus some of its tech peers. It is higher up the risk curve then, but could still prove a big long-term winner given the valuation looks moderate on conventional tech valuation metrics.
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But knowing which blue chips to buy, and when, can be fraught with danger.
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You can find Tom on Twitter @tommyr345
The Motley Fool Australia owns shares of and has recommended TPG Telecom Limited. The Motley Fool Australia has recommended Integrated Research Limited, Ramsay Health Care Limited, and Webjet Ltd. 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 Scott Phillips.