Strong Companies We Can Learn From

April 16, 2021

By Daniel Cohen

There are many ways to invest for the long-term. Index funds are popular and offer a good way to easily diversify your money either into the broad market or favored sectors. Mutual funds also provide a good way to invest on a regular basis, and most retirement plans that allow for payroll deductions use mutual funds for employee contributions.

Some brokers sell packaged investment products like variable annuities, index annuities, structured notes, and other investment trusts. These instruments provide an alternative way to gain exposure to the markets, often with a guaranteed minimum return or principal protection. However, these alternatives have a high cost of ownership.

Underlying all these different ways to invest are the companies that make up the publicly traded markets. Many successful investors forgo index funds, mutual funds, and the alternative investments and instead purchase shares of leading companies directly. Through proper planning, they build a diversified, tax-efficient portfolio to achieve their financial goals.

What makes a company worth investing in? How do we determine winners from losers? Some companies seem to be winners one day and losers the next. There is no formula that works all the time as even the best money managers may sometimes find poor performers in their portfolio.

Understanding the Big Picture

If your goal is to own a portfolio of great long-term positions, then don’t focus too much on short term price movements. The markets are volatile much of the time, and the price of any company’s shares fluctuate daily. Much of the movement has nothing to do with the fundamentals of that company. I always advise not to make frequent trading decisions based on short term movements of the market, and not to sell positions due to short term underperformance relative to the market.

At times, some sectors go out of favor but if you own a leader in that sector you may be best off holding through that market cycle. For example, banks underperformed for a few years and many investors sold positions in that sector and missed out on the recent strong performance. The same thing happened recently in the energy sector. Some investors moved money out of energy stocks but the companies in that group have outperformed the market as energy prices rebounded this year.

The Fundamental Indicators

Of course, fundamentals should be a primary consideration when investing in a company. There is plenty of data available about the financial history of public companies including dividends paid out. Growth of revenue and profits are important considerations along with a growing stream of dividends. Growing dividends over a long period of time tends to indicate financial strength in a company. The company’s products or services should be adaptable and expanding into the foreseeable future.

Perhaps most importantly, the company also needs a strong management team to operate efficiently and anticipate changes in their industry so they can adapt and remain a leader. While this last quality is among the most crucial, it’s also one of the most difficult to identify.

Follow the Leaders

There are many great companies to invest in that have the financial history and strong management to execute on their business plans and also been able to adapt to changes in their industry. Disney, Microsoft, and NextEra are three examples of companies that have adapted well to changes and have rewarded their shareholders handsomely.

Everyone knows the Disney brand and millions of people around the world visit their theme parks and watch their movies. Many would have thought it would have been best for the company to stick to their formula of slowly expanding their parks by adding attractions and bringing out new movies each year.  But, fifteen years ago, management started acquiring media properties starting with Pixar Animation Studios in 2006, Marvel Entertainment in 2009, and Lucasfilm in 2012.

In strategically managing its acquisitions, Disney has cultivated and developed a good deal more popular entertainment cultivated from all those brands under ownership. Additionally, Disney+ launched last year to offer unlimited access to Disney entertainment, and subscriptions have outpaced expectations by a wide margin. This company has clearly adapted well over a long period of time to changing market conditions and is leading its industry.

Adapting to Trends and Technologies 

Microsoft is also a company known all over the world with its software being essential to personal and business computers. However, for many years after growing significantly in the 1980s and 1990s, the companies stock price hardly moved for 15 years. Though it continued to be the market leader in its industry, Microsoft was considered old technology and from the year 2000 until 2015, the stock did not gain. However, patient investors would have received a regular dividend starting in 2003 which was increased on a regular basis. Since 2015, the stock has multiplied almost five-fold and the dividend continues to grow.

Microsoft’s management invested in cloud infrastructure to complement its legacy business and has also developed and acquired businesses in gaming. The Microsoft of today is clearly a technology industry leader. Recent investors have been rewarded and so have long-term investors, even factoring the years of no price appreciation.

NextEra Energy is a great example of an old industry leader that was able to reinvent itself to the changing dynamics of its industry and the overall market. Florida Power and Light was the leading utility in the state when I began my career there. I bought shares of the company for the stable dividend it provided with modest growth. Utilities historically provided above average yields with less volatility than the market and traditionally were suitable investments for widows and orphans for their income and stability. However, things change.

Florida Power and Light became NextEra Energy and invested in renewable energy. They are now a major generator of power from wind and solar assets. Management anticipated changes and executed well on their strategy. The company has been among the top performing utilities and is owned in many clean energy portfolios even though they still generate much revenue from their legacy regulated utility business. Long-term owners of the stock have been rewarded with both share price gains and growing dividends.

There are countless other examples of high performing companies in the market that share the basic fundamentals of performance history, leading products & services, market adaptability and strong management teams. It makes sense to learn from them!

What Experience Can Tell Us

Despite all we know about what makes companies perform and generate investment returns, some investors try to get a step ahead of the markets and anticipate gains in specific stocks or industries. Rather than making long-term investments, they trade frequently, and studies show that more often than not, performance suffers.

Predicting the market’s near-term future is almost always a dubious objective. Looking only at the current snapshot of a company’s stock position while ignoring it’s history, management team and other influential factors, provides an incomplete investment picture.

Successful investment planning, or the lack of it, can make a profound difference in an individual’s or family’s future. For most people, financial planning is best done with the help of a trained, experienced and trusted financial planner.

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