ANOTHER ESSAY ON "HOW TO PICK LONGER TERM STOCK MARKET WINNERS"

Cape 28 September 2021

If we do decide to allocate our capital to stocks, this then raises some follow-on questions: What stocks should we buy? How can we assess their strength? Do they have any weaknesses? What are their future prospects like? Will they be able to handle an inflationary environment? You might know that our philosophy at Simply Wall St is to not try to predict where the market is going or what will happen next in the macro environment. Instead we’d do well to continue following some core investment principles that have stood the test of time. One of them is:  Buy high-quality businesses with good long term prospects at a price below their intrinsic value. Here’s some questions, a checklist of sorts, that can be useful to ask ourselves when looking at a stock (and how Simply Wall St can help in some areas): 1. Is the company a high-quality business that generates high returns on capital? “Quality” businesses are those that have a sustainable competitive advantage over their competitors. Think of things like brand power (Apple NASDAQ:AAPL), economies of scale (Costco - NASDAQ:COST), or network effects (Facebook - NASDAQ:FB).   In terms of determining the company’s return on capital (how much it makes per dollar invested), you can check out the Simply Wall St Past Performance section within each company’s report to see how well the company allocates money. Here’s an example of Apple’s returns. 2. Does the company have good future prospects? As mentioned in Part 2, it’s much easier to invest in industries with tailwinds rather than headwinds. If the company has good growth prospects with more room left in its Total Addressable Market (TAM) to serve, then it’s got room to grow. On Simply Wall St you can check out the Future Growth section, here’s Amazon (NASDAQ:AMZN) for example. 3. Is the business capital intensive? If the business requires a lot of upfront capital invested to generate its product or service (think manufacturing or construction), then it can be vulnerable to inflation pressures if the cost of its inputs increase. However if it’s a capital light business model (think software), then it’s less vulnerable to having its margins eaten away by inflation (that is if its costs increase but it can’t increase its prices equally). Here again, for example, we can see Apple’s operating expenses remaining flat while revenues have increased, which have helped drive profit margins higher. 4. Can the business raise its prices at or above the rate of inflation? Think about it this way, does the business provide enough value to customers where they are happy to pay up if prices increase? Or would they go to the cheaper alternatives? Is the business in a market where consumers are simply looking for the cheapest product, or does the company have a business or status where it can afford to raise its prices and not lose any customers?  5. Is the business able to afford its debt? (if it has any)  Given the current low interest rate and inflationary environment, taking on debt is actually quite an appealing source of capital. So utilizing debt effectively can help a company increase its profitability. The key here is to assess if the debt is affordable, especially if interest rates were to rise.  Within the Financial Health section, we run checks on the affordability and absolute level of debt, so you can get a quick understanding of both how leveraged a company is, and how affordable that debt is. 6. Is the business in a growing industry? As mentioned before, investing with tailwinds is easier than investing in an industry facing headwinds. You may know of industries that are growing and that you want to invest in, but not be aware of the particular companies within it. We’ve got a screener to help with that. If you want to look at the Renewable energy sector for example, which we know is growing, you can start by checking out the Global Renewable energy screener we’ve developed, then drilling down from there depending on what country you want to look at. 6. Is the company trading at a discount or premium to its intrinsic value? We could do a whole email series on the nuances of valuation, so we won’t go into depth here but just keep this in mind. A high quality business can become a bad investment if you pay too much. If now isn’t the right time to buy, be patient. If the company still ticks all the other boxes for you, it’s worth putting it on your Watchlist within SWS because the market can fluctuate and give you an opportunity to buy at a better price. From there, you can monitor all its developments, set your own fair value and we’ll keep you up to date on all the important updates. This list is by no means all-encompassing, but by simply following this short checklist and other timeless investment principles (which we’ve covered in our 3-part election series last year), we can position ourselves to: Better withstand whatever macro-environment we face Make more informed investment decisions Avoid succumbing to FOMO Be confident in the portfolio of high-quality stocks that we own Take advantage of structural growth opportunities Not overpay for businesses, no matter how good they are Wrapping up So that brings us to the end of our 3-part series! We’ve covered 3 global issues that are causing structural multi-year changes and how to navigate or take advantage of them, with some help from the Simply Wall St platform. We hope you’ve enjoyed this series and got some value out of the content covered! Invest Well, Michael Paige Simply Wall St Download the app This email is from Simply Wall Street Pty Ltd, 17-21 Bellevue Street, Surry Hills, NSW, Australia. Simply Wall Street Pty Ltd (ACN 600 056 611), is a Corporate Authorised Representative (Authorised Representative Number: 467183) of Sanlam Private Wealth Pty Ltd (AFSL No. 337927). Any advice contained in this email is general advice only and has been prepared without considering your objectives, financial situation or needs. You should not rely on any advice and/or information contained in this website and before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice. Please read our Financial Services Guide before deciding whether to obtain financial services from us. Privacy Policy Terms and Conditions Unsubscribe - Unsubscribe Preferences