These are 3 of the very best companies on the whole stock market. Be prepared to buy them when the price is right.
The Great Stock Market Swoon of late 2008 and early 2009 saw the share prices of most companies slashed by 20%, 30% or more.
Even stable companies like Tesco (LSE: TSCO) and British American Tobacco (LSE: BATS) saw their share prices tumble, but that was nothing to the punishment meted out to highly indebted concerns like Punch Taverns (LSE: PUB), Taylor Wimpey (LSE: TW) and the banks.
The share prices of some of those companies deserved to be pummelled. Too much debt is a recipe for disaster, whether it be the £50 you owe to the local loan shark, the £5,000 you owe the credit card company, or the £2 billion the company you invested in owes its bankers.
It was pandemonium out there on the stock market. The good was being thrown out with the bad. Fear and panic was driving the stock market lower, not good old-fashioned fundamentals.
Buying Opportunity Of A Lifetime
For those investors who were well prepared, it was the buying opportunity of a lifetime. Warren Buffett loaded up, splashing out billions on preferred shares in companies like Goldman Sachs and General Electric. To date, that splurge has make him billions more.
Buffett was prepared. He'd done his homework. When the market went silly, dragging down the share prices of just about every quoted company with it, he knew exactly which companies he'd buy, and at what prices.
None of us knows where the stock market will go from here. With the economy improving, you'd think we may not see another mass-panic buying opportunity as we had in March this year. But if we do, to make sure you don't miss out on the next buying opportunity of a lifetime, the time to do your homework is now.
Three Of The Best
With that in mind, I have put together what I consider to be three of the very best companies listed on the London stock exchange. These are not the best buys right now, because they are expensive.
Unfortunately, great companies usually come with expensive price tags. Investors, rightfully so, are willing to pay a premium price to own shares in fast growing companies with strong, sustainable competitive advantages.
But every now and then, especially when the whole market is fearful, as we've seen on a number of occasions over the past 2 years, the share prices of these great companies suddenly become attractive.
You may have to be quick, because good prices don't last long. As Jeremy Grantham of GMO said in his most recent quarterly letter…
"After 20 years of more or less permanent overpricing of the S&P, we get five months of underpricing. There is no justice in life! Well, at least not for the apparent handful of us who welcome the opportunity to invest at bargain prices!"
Loads Of Money
When looking for what I consider to be the very best companies, I firstly look for companies with low capital requirements coupled with high operating margins. These are typically found in the financial, software and support services sectors.
Low capital requirements mean they spin off bucket loads of free cashflow, the lifeblood of any business. The more cash a company generates, the more opportunities for shareholders to prosper, whether that be via dividends, share buy-backs or acquisitions.
A high profit margin is an indication of a company having a strong competitive advantage and a recurring revenue stream. In the US, think Microsoft and Google. In the UK, think a company like Sage (LSE: SGE), although it doesn't have quite the competitive advantage of those US giants.
Anyway, without further ado, here are my three of the best companies on the market today…
Company #1: Autonomy (LSE: AU)
Autonomy is the search engine of choice for corporate customers. A 2007 quote from a UBS client on the Autonomy website sums how its software works, and how it can benefit customers…
"The essence of Autonomy's software lies in its ability to extract the core concepts of unstructured data. The way in which it achieves this is arguably some way ahead of any rival product."
Autonomy enjoys huge operating margins, above 37% in 2008. It is also growing quickly, with analysts forecasting earnings growth of 45% in 2009 and a further 20% in 2010. And remember, we're in a global recession.
Autonomy trades on a forward P/E of 18, just a little too rich for my liking. But, if a buying opportunity presents itself in the months ahead, I'll be prepared.
Company #2: Rightmove (LSE: RMV)
Rightmove dominates the online property market. Its dominance is reflected in operating margins above 50%, by that measure making it one of the most profitable companies in the world.
Obviously the property market has been going through a rough time, and Rightmove's growth has suffered. Even still, it looks like it will be able to produce some year on year growth in 2009, and analysts are currently forecasting 18% growth in 2010.
I am cautious on the housing market, but if Rightmove shares were to be taken down by a market correction to levels which suggest they'll struggle to grow ever again, I'll be ready to pounce. Rightmove have been on my watchlist for a while now, and as to why I didn't buy when the shares slumped to 160p at the turn of the year remains one of life's unsolved mysteries.
Company #3: Climate Exchange (LSE: CLE)
Climate Exchange operates exchanges to facilitate trading in environmental financial instruments, including emissions reduction credits in both voluntary and mandatory markets.
Obviously, with climate change being all the rage, the company operates in an exciting and potentially explosive growth market. However, I must admit its choice on my list is a bit of a wildcard. To date, Climate Exchange is loss making. It is difficult for me to assess its competitive advantage, mostly because I don't fully understand its products and services. And then there's the regulatory climate. How will that affect the business?
But I do know 2 things…
1) Companies who operate electronic exchanges have traditionally been very profitable and have had large barriers to entry. Once trading volume gets to a certain level, customers are reluctant to switch to a rival exchange.
2) Climate Exchange's trading volumes are flying, albeit off an admittedly low base.
The market certainty has cottoned onto Climate Exchange, putting a market capitalisation of £400m on it despite 2008 revenues being only £23m. Its 2010 forward P/E is 35, putting it way out of reach of value curmudgeons like myself. If nothing else, it will be interesting to follow progress of this young, exciting company.
Three More Great Companies
Remember, these are three of the best companies I've identified. You may have some favourites of your own. Resources companies, for example, have high profit margins, as do tobacco companies.
Maynard Paton, our Chief Investment Analyst at Champion Shares, has just completed a special report listing his three favourite companies. I've had a sneak preview, and can tell you they are a) different to my three, and b) all FTSE 100 companies. They, too, are great companies, and if and when the market offers them up at compelling prices, I know Maynard will be quick to rush out a 'buy' recommendation to Champion Shares members. To access the special report, sign up now for a free 30-day trial.
Please feel free to share your best companies in the comment boxes below. Together, we'll all be prepared for the next market crash.
More on the economy and the markets:
• It's Full Speed Ahead For The Bull Market
• Banking Bonuses Must Be Capped
• 3 Reasons Why September Is A Horrible Month
> Bruce Jackson does not have an interest in any of the companies mentioned in this article.
