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The Qualiport invests in great companies at attractive prices. Find out more »

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The Ideal Qualiport Company

The Qualiport aims to buy great companies at attractive valuations and hold for the long term. But how exactly does the portfolio define 'great companies'? Outlining the points to consider, here's the portfolio's checklist for its ideal share.

(Note: the Qualiport will never find a company that meets all its requirements. In all investment decisions, a fair amount of subjectivity is involved - the pros have to be weighed up against the cons.)

A company that is easy to understand

Investors have to judge for themselves how a business is performing, and not become over-reliant on comments from the management (you see, they're not always upfront about how things are going). It's always best to define your circle of competence, as a focus on certain industries and specialised sector knowledge usually pays off. Read more.

A company with sustainable competitive advantages

"The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors." -- Warren Buffett.

Determining a company's competitive advantage is not always straightforward. However, considering Michael Porter's five 'industry forces' can help. Thus: is rivalry within the industry already intense? Are significant barriers to entry in evidence? Does the company suffer from substitute products? Does the company deal with powerful customers or suppliers?

A company with predictable, repeat business

Predictable earnings are all-important for the long-term share investor. If you can't be reasonably confident of a company's future profitability, disappointment will surely loom. Companies that manufacture products which need to be bought time after time, or provide services that are required on a regular basis, offer far more predictability than a business that produces items of a one-off nature. Read more.

A company focused on what it knows best

Long-term investors must consider how a company's past earnings were created. Generally speaking, the best businesses to own are those that have grown without recourse to merger and acquisition activity. The worst businesses to own are those that are constantly adding to (and disposing of) their operational interests.

The worst form of acquisition strategy is diversification. Companies frequently buy businesses worse than their own and end up with all sorts of operational problems. Read more | more | more.

A company with a proven track record

If your chosen business hasn't performed well over the last, say, five years, why should its fortunes improve over the next five? The Qualiport has no interest in untried and untested companies while plenty of proven operators exist. Sadly, hope loses you money. Read more.

A company with high margins

A high operating margin is a good indication of a possible 'franchise'. Such margins could stem from limited competition or a strong operational advantage, both of which are attractive features of any long-term share. Read more.

A company with low fixed-asset requirements

It pays to avoid those businesses that have a real hunger for tangible fixed assets. Constantly refurbishing or replacing fixed assets can strain cash flow, while competitive advantages are restricted because a rival can purchase similar items. On the other hand, intangible assets are inherently difficult for rivals to replicate and typically do more for long-term investors. Read more.

A company with low working-capital requirements

The importance of working capital to investors is simple: it highlights the trading relationship between a company and its customers and suppliers. Both of these groups can cause difficulties at a company long before shareholders get to hear about it. Thus, working capital can be a big drain on a company's resources: investors want to see cash flowing into their own pockets, not tied up in stock (which may not be sold) or debtors (which may not be paid). Read more | more | more | more.

A company without too much debt

Debt can be a killer for shareholders and excessive borrowings can bring even the best businesses to their knees. Unless there's something really special about the company, investors ought to be wary of interest cover in the low single digits. Ideally, companies with large piles of net cash should be your first port of call. Read more.

A company that can produce a high incremental return on equity

"Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return. The worst business to own is one that must, or will, do the opposite -- that is, consistently employ ever-greater amounts of capital at very low rates of return." -- Warren Buffett.

The less funds needed to increase profits, the better. 'High return' businesses generate excess cash, leaving more scope for healthy dividends, share buybacks and so on. On the other hand, 'low return' companies gobble cash, hence leaving little for shareholders. Read more.

A company that records few exceptional items

Exceptional items are a true economic cost to shareholders and should be taken into account when assessing any business. Substantial one-off exceptional charges can hide a multitude of sins, while the 'recurring exceptional' puts 'underlying' profits into doubt. The best companies rarely report exceptional costs. Read more.

A company without a pension black hole

FRS17 is fast opening up a corporate can of worms. Businesses with onerous pension liabilities or aggressive liability assumptions could upset shareholders if additional scheme funding depresses future profits. Read more.

A company that likes to buy back its shares

Share buybacks are good news because the company in question is spending money on what it knows best -- itself. A buyback suggests the boardroom is not full of fanciful or aggressive expansion plans and indicates the firm has excess cash on its books. Read more.

A company with lots of boardroom experience

An important factor when investing for the long term is having your company run by management who have seen it all before. Certainly investors should put more faith into old hands, rather than those bosses new to the job or have yet to experience economic trouble. Read more | more.

A company not run by fat cats

Too much boardroom pay with too little corporate progress rarely provides shareholders with many favours. Substantial bonuses, bumper 'appreciation awards', hefty salary increases and generous option schemes when profits are going nowhere can all point to bad management. Read more | more.

A company without a staff problem

It is often said that a company's greatest asset is its staff. Not for the Qualiport, though. Long-term investment success is rarely based on highly paid specialist employees, who can leave at a moment's notice. In fact, the best businesses to own are those that can generate the greatest revenues from the fewest employees, while spending the least on salaries. Read more.

Where Next?

So there you have it -- the qualities of a perfect company. All you've got to do now is go out and find one! Oh, and if you do find one, please let us all know about it on the Qualiport discussion board.

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The Qualiport is published every Tuesday.



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