There are hundreds of companies listed on the ASX. This makes the process of deciding which ASX-listed companies to invest in a significant challenge for investors. Value investors preach the idea of buying high-quality companies which are trading at prices below true value. As Warren Buffett has demonstrated, this can be a highly profitable investment strategy. This investment strategy, however, does require you to first be able to identify a high quality company and understand its value.
One ASX-listed company which I believe passes the quality criteria is Reece Ltd (ASX: REH). Reece is Australia's leading supplier of bathroom and plumbing products and with hundreds of stores across the country, it is also a well recognised brand. The Reece share price is currently trading at $10.34. This share price represents a 20% discount in comparison to the highest share price achieved for Reece in the past 12 months.
Why Reece is a high-quality company
Reece has continually generated value for shareholders with high returns on equity over the past ten years. In this same time period, Reece's earning per share have more than doubled, while debt levels have remained low. This is a positive sign, demonstrating that the company's management teams have been able to put retained earnings to extremely good use. Additionally, they have not needed to use leverage to maintain their consistently high returns to shareholders.
Reece has recently acquired MORSCO Inc, a US-based plumbing business. Although completing this acquisition has increased the debt profile of Reece, it also gives the company access to the growing US market. The Reece management team have demonstrated great skill in growing the Reece business so far. If this can continue while expanding into the US, the value of Reece and its shares will also continue to grow.
Foolish Takeaway
Buying high-quality companies and holding them for a long time is a good investment strategy, so long as these companies are purchased at affordable prices. I believe that Reece is a high-quality company but that the Reece share price is currently too high to justify an investment. If the Reece share price does decline further, this could represent a great buying opportunity. Reece would be a great addition to anyone's portfolio and monitoring the share price for the next opportunity would be worthwhile.
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