Qualiport

What's A "Best" Company?
Wednesday, 11 November 1998

A Qualiport definition

Last Friday, we started in earnest our hunt for the 6 best companies in the world. A couple of posts on the Qualiport message board questioned the definition of "best." I agree that it is somewhat difficult to put your finger on, as my "best" may be someone else's worst. So today I'm going to attempt to put some sort of definition on the meaning of "best."

-- The company will usually be in the top three of its industry.

Note the world "usually." The best companies just keep on getting better. As they get better, they get bigger. Biggest doesn't always mean a company is the best, but being the best will often mean being the biggest. There is a subtle but important difference.

-- The company will usually operate in a growing industry.

We don't want to be looking at companies operating in the coal mining industry, no matter how good they may be. Likewise, we don't want to be looking at supermarket retailers, which, when judged on sales per store, will usually only grow by the rate of inflation plus a factor for the small annual population increase. Admittedly, supermarkets can gain market share from competitors, but this is a market in which companies largely compete on price alone. That is not a long-term sustainable competitive advantage. Which brings me to...

-- The company will have a sustainable long-term competitive advantage.

Something as simple as a brand name can give a company a competitive advantage. When you think jeans, you probably think Levi. When you think soft drink, you probably think Coca-Cola. These are huge brand names, but their strength has not happened by accident. Years and years of brand promotion, and millions spent on advertising and sponsorship, have made these brands as big as they are today.

A company like Microsoft probably has the ultimate competitive advantage -- they operate an effective monopoly. How that monopoly was built up is not at issue here. We're happy to leave that one to the US courts.

For many years British Telecommunications (BT.A) had a monopoly over telephone land lines. That has eroded over the years as the government has forced BT to open its market to competitors. Still, today BT still have a huge chunk of the domestic market.

A company's size can give it competitive advantage. If a smaller competitor starts looking like it may be coming up with a revolutionary new product, the large company has the resources to thwart its aims. An example I like to give is Psion's (PSI) hand held computers. They are acknowledged to be technically the best product on the market, yet giants like Philips and 3Com are outselling them. This is mainly due to the larger companies' distribution clout and advertising spending. Psion just can't compete because it is a relatively small company with relatively small cash resources.

-- The company will have some pricing power.

This goes hand in hand with most of the other criteria listed above. It almost goes without saying that a company selling an essential superior product with a strong brand will be able to pretty much set its own price. Microsoft again springs to mind.

If you add the above four "best" qualities to the established Qualiport criteria, they will hopefully lead us to look at some quite impressive companies.

Last Friday I threw up some companies from the Technology and Communications sectors. They included companies like Microsoft, Dell Computer, Intel, Cisco, Vodafone (VOD), Orange (ORA), Nokia and British Telecommunications. Do any or all of them pass the "best" company criteria?

Unfortunately for us, the perfect company doesn't exist. All of us could pick holes in the above companies, even though some of them are arguably in the top echelon of companies in the world. That's what makes the task of picking the 6 best companies in the world all the more difficult. We are going to have to make a subjective decision to narrow down the field, and there is a very good chance that we will leave out the wrong company. But that's what makes stock selection so challenging and so much fun.

On Friday, we will start looking at what may be the "best" companies from the Pharmaceutical, Information Technology and Internet sectors. If you've got any suggestions or comments, please feel free to share them on the Qualiport message board.

Portfolio Update

Last week we received the Rentokil Initial interim dividend. It was for the princely sum of £16.75, and we gleefully added that to our cash balances. We are now sitting on £3,975.57 cash. We intend to invest that in the market over the next few weeks, but we will be patient if the prices of the shares we choose are not quite right. If we select 6 great companies for our Qualiwatch, the chances are that over the next 6 months, we will have an opportunity to pick up shares in 2 of those companies at attractive valuations. If not, we shall patiently wait. Perhaps another great company may pass by our radar which may be able to be purchased at an attractive valuation.

We are not staying out of the market as a whole because we think it is overvalued. In fact, we never look at the macro stock market situation, because we are not buying the market. We are always looking to buy individual companies and to outperform the main share index.

The Qualiport numbers, as usual, are updated with this report each Wednesday and Friday evening. I have said on quite a few previous occasions that the value per share accounting gives a somewhat misleading indication as to whether the Qualiport is beating the market. I much prefer to use the following table, which I periodically put up on the site. I then give you, the reader, the opportunity to decide for yourself whether you think the Qualiport is beating the market. I haven't yet added our two recent purchases, Independent Insurance and PizzaExpress, as we've only owned them for such a short period of time. For what it's worth, however, both are so far beating the market.

   
                               Buy    Now    Up/(Down)
Rentokil Initial     FTSE     5020    5477      9%
Purchased 19/12/97   Shares    255     376     48%
    
EMAP                 FTSE     5922    5477     -8%
Purchased 17/04/98   Shares   1185    1085     -8%
   
Marks & Spencer      FTSE     5969    5477     -8%
Purchased 11/05/98   Shares    554     445    -20%
    
Unilever             FTSE     6116    5477    -13%
Purchased 17/07/98   Shares    672     627     -7%

See you on Friday.

Bruce Jackson (TMF Googly)

Qualiport Numbers

                           11/11/98 Close

                    Company   Change    Bid
                      EMA      0.00    10.85
                      IIG     -0.01     2.74 
                      MKS      0.12     4.45
                      PIZ      0.00     7.98 
                      RTO      0.09     3.76
                      ULVR     0.05     6.27 

Qualiport Stocks

Last Rec'd  Total # Company  In At  Current  Change
 19/12/97    783      RTO     2.55    3.76    47.5%
 27/10/98    755      IIG     2.58    2.74     6.2%
 04/11/98    245      PIZ     7.93    7.98     0.7%
 17/07/98    298      ULVR    6.72    6.27    (6.7%)
 17/04/98    169      EMA    11.85   10.85    (8.4%)
 11/05/98    368      MKS     5.54    4.45   (19.6%)


Last Rec'd  Total # Company   In At     Value    Change
 19/12/97    783      RTO    2046.53   2944.08   897.55
 27/10/98    755      IIG    1972.64   2068.70    96.06
 04/11/98    245      PIZ    1966.34   1955.10   (11.23)
 17/07/98    298      ULVR   2052.54   1868.46  (184.08)
 17/04/98    169      EMA    2052.57   1833.65  (218.92)
 11/05/98    368      MKS    2054.11   1637.60  (416.51)


Cash:                                   £3,975.57
Current Total :                        £16,283.16

Total Invested:                        £16,184.62
Profit/(Loss) :                           £ 98.54

Value Per Share

                    Day      Month      Year    History
Qualiport          0.99%     3.18%     35.57%    38.62% 
FTSE 100           0.82%     0.71%      6.65%     9.10%
FTSE All Share     0.66%     0.90%      4.83%     7.03%

For an explanation of Value Per Share accounting, please click here.