As an annual tradition, we have put together a list of stocks which we believe are of outstanding quality to long-term investors. Please note that valuation is out of the consideration at the time of writing, as Mr. Market can easily move stock prices and the situation can change quickly. By contrast, business fundamentals, such as sustainable competitive advantage, growth prospects, return on capital and management culture may very likely remain similar from one year to another. Hence, we strongly recommend investing like playing a no-called-strike game by focusing merely on quality names and waiting patiently for favorable entry points.
Again, by "quality," we usually refer to a high cash return on capital, a wide competitive moat, a promising long-term organic growth prospect and able and honest management.
We understand that quality may easily attract attention (at least at some stages of the market cycle). It is without our doubt that our picks (both previously and in the future) tend to be expensively-priced compared to the general market. But they, as a group, still have delivered some good results so far. Check out the performance review of our previous picks here.
Now here is our episode for 2020.
Founded in 1837, France-based Hermes designs, manufactures and markets ultra-luxury goods, with specialization in leather goods and saddlery, ready-to-wear and accessories, silk and textiles and perfumes. The company mainly operates under its namesake brand, which is more than a century old and consistently ranks among the top global brands.
Technology One (ASX:TNE)
Australia-based Technology One is the country's largest enterprise software provider, started by tech entrepreneur Adrian Di Marco in a demountable office of a hidden factory in Brisbane around three decades ago. During recent years, the company has successfully transformed itself from a traditional "on-premise" software business to a software-as-a-service provider with a cloud-first, mobile-first focus. Its 99% customer retention rate is top-notch in the industry and signals a sustainable competitive edge of the business.
Nihon M&A Center (TSE:2127)
Japan-based Nihon M&A Center is the nation's largest independent merger & acquisition service provider. Its niche focus on the smaller enterprises and expansive deal network (consisting of around 100 regional banks and 900 accounting firms across the country) helps the business dig a wide and deep economic moat to fend off competition. At the same time, an aging population is expected to propel the long-term growth, as Japanese small businesses, which are the backbone of the national economy, face challenges in hiring younger leaders.
Rochester, New York-based Paychex is the recognized leader in the payroll, human resource and benefits outsourcing industry, founded in 1971 by American entrepreneur Thomas Golisano with just $3,000. The company acts as both a "cash-cow" and a "cash-calf," in our opinion. The legacy Management Solutions segment contributes to the majority of the sales, grows at a stable low-to-mid-single-digit annual growth rate, and is "protected" through a high switching cost. In the meantime, the PEO & Insurance Services segment drives the majority of growth momentum, benefiting from the industry tailwind of the increasing popularity of PEO as the go-to HR outsourcing solution among small and medium-sized enterprises.
New York-based MasterCard operates one of the world's largest and fastest payment processing networks, connecting consumers, financial institutions, merchants, governments and businesses in more than 210 countries and territories. With a massive base of underserved cash/check consumers worldwide, the company should not see its secular growth slow down anytime soon.
SEI Investments (SEIC)
Pennsylvania-based SEI Investments is a global provider of investment processing, investment management and investment operations solutions that enables corporations, financial institutions, financial advisors and ultra-high-net-worth families to create and manage wealth. The company generates highly-predictable, recurring revenue through its technology-driven platforms, which are generally embedded in the day-to-day, mission-critical operations at the clients.
Atlanta-based Rollins is the premier provider of pest and termite control and related services for household and commercial customers around the world. The company sets itself apart through its remarkable track record of profitable growth. Since 1998, the business has not recorded a single year-over-year decline in revenue, gross profit, or operating income. We are not sure whether such a long-term record exists at any other public company anywhere in the world these days.
Denmark-based SimCorp provides integrated software solutions for the buy-side industry worldwide to enhance efficiency, ensure regulatory compliance and save costs. The company has already signed up almost half of the world's top 100 investment managers, including leading financial institutions, insurance companies, pension funds, wealth managers, sovereign wealth funds and banks.
UK-based Bioventix PLC creates and supplies high-affinity monoclonal antibodies for use in blood-testing machines that are used in hospitals and other labs around the world. Despite the complex science behind high-affinity monoclonal antibodies, we highly appreciate the robust and straightforward royalty-driven business model of this 12-person company.
OTC Markets Group (OTCM)
New York-based OTC Markets Group is essentially the financial market providing price and liquidity information for over-the-counter (referred to as "OTC") securities across OTCQX, OTCQB and Pink. The company principally acts as the only major platform serving all parties, including broker-dealers, investors, traders, accountants, regulators and listed firms, in the OTC market, and it also benefits from a multi-sided network effect.
UK-based Nichols PLC is an international provider of still and carbonated soft drinks in more than 85 countries and territories. While the company owns a diversified portfolio of brands, its primary business has been built around the British classic Vimto drink, which just had its 111th birthday last year and has even become a big Ramadan tradition in the Muslim world.
California-based Intuit develops financial and compliance management software for private individuals as well as small and medium-sized businesses. Over the past few years, the company successfully transformed from a desktop software provider to a cloud-based product and service platform, which leads to highly recurring sales that are high-margin and cash-rich.
Oregon-based Nike is the world's largest supplier of athletic shoes and apparel and a major manufacturer of sports equipment. Aside from the leading brand and scale advantage, we also appreciate the company's growth prospects in the Chinese market. Nike is a rare long-lasting success story among foreign businesses in the intensely-competitive country. The fact that the company mainly competes with non-Chinese brands like Adidas (XTER:ADS) in China is one of the vital favorable factors that could sustain its competitive advantage, in our view.
Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the financial market. We own shares of Hermes, Technology One, SimCorp, Rollins, SEI Investments, Nike, Paychex, Nichols, OTC Markets Group, Bioventix, Nihon M&A Center and MasterCard.
Read more here:
A Quick List of Nordic Picks
Rightmove: A Solid Moat With Mixed Growth Prospects
Performance Review of Our Annual Stock Picks
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This article first appeared on GuruFocus.