In today's volatile and uncertain environment, it can be reassuring that there are certain characteristics of shares that perform well over the long term.
In investing lingo, these types of shares are known as compounders because they can offer compounding returns to their holders during both boom and bust cycles of the economy.
Specifically, compounders share the following characteristics:
- Solid balance sheets with little to no long-term debt
- High earnings margin, and
- Consistent earnings growth over the past decade
The total debt/equity percentage on the balance sheet is one helpful ratio in uncovering a company's fundamentals. We also consider net income margin percentage for earnings and the 10-year compound annual growth rate (CAGR) of diluted earnings per share (EPS) percentage to gauge earnings growth.
We've researched some compounders that share these fundamentals below.
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Whitehaven Coal Ltd (ASX: WHC)
Whitehaven has low debt with a total debt/equity percentage of 5.81%. Its earnings margin is also strong at 39.6% while its earnings growth stands at 33.4%.
Recent positive developments also support the coal producer's fundamentals. In the company's most recent quarterly report, the average price of coal lept from $514 a tonne in Q2 2022 to $581 a tonne in Q3 2022.
A macro factor working in Whitehaven's favour is that demand for coal is beating supply, putting upwards price pressure on the commodity.
Magellan Financial Group Ltd (ASX: MFG)
Magellan is another compounder that has strong fundamentals. Its total debt/equity percentage is 1.22% while its earnings margin beats others on this list by a huge amount at 69.6%. Its earnings growth rate is also a healthy 37.6%.
The troubled fund has ambitious plans in the future for turning its fortunes around. Last Thursday, the company announced at its annual general meeting that it intends growing its funds under management to more than $100 billion over the next five years.
Some tactics Magellan will use to reach this target include the creation of an incentive plan that unifies employee and shareholder interests.
Pro Medicus Limited (ASX: PME)
Pro Medicus has a total debt/equity percentage of 2.24% and an earnings margin of 47.2%. Its earnings growth rate is the highest on the list at 49.7%.
Although the medical imaging IT company has an unusually high price-to-earnings (P/E) ratio of 129.51, some experts agree with the claim it deserves to be considered a compounder.
Hayborough Investment Partners' Ben Rundle believes it ticks all the boxes of a great share investment. This includes its earnings, product, and management team. Meantime, Medallion Financial's Michael Wayne says that these fundamentals are "trending in the right direction".
The bullish sentiment surrounding the stock may be vindicated when it holds its annual general meeting on 21 November.
