Last year around this time, I wrote about three FTSE 100 companies that seemed to possess the most attractive prospects for investors in terms of total returns for 2014 and beyond.
ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US), SABMiller (LSE: SAB) and Unilever (LSE: ULVR) (NYSE: UL.US) looked as if they had decent immediate growth prospects and good long-term potential.
To arrive at the selections I first eliminated as much cyclicality as possible from the starting list, which meant out with the financials, the insurance companies, the commodity firms, and retail shares. Out also went shares where investors mainly rely on dividend income for a return, so no utilities, supermarkets, tobacco producers or big pharmaceutical companies.
Given what we’ve seen in some of those sectors during 2014, cutting out cyclicality and dividend-reliance worked out well. With those still left on the list, I looked for an enduring competitive advantage and potential for earnings’ improvements in the coming years.
A good performance
During 2014, the shares put in a workmanlike performance, with ARM Holdings up around 8%, Unilever up about 15% and SABMiller up approximately 21%. That’s a ringing endorsement for going with the strongest sector performers and paying attention to forward growth prospects. The result is especially pleasing when we compare it to the performance of the FTSE 100 index over the same period, which fell 3%.
One thing that didn’t put me off selecting this trio of robust businesses was valuation. When it comes to well-established firms with great trading franchises and decent forward prospects, I’m a great believer in looking at valuation measures such as the P/E rating as a quality mark, in the style of successful growth investors of the past such as US-legend Philip A. Fisher, who wrote the classic investing book Common Stocks And Uncommon Profits.
Those other legendary investors across the pond Warren Buffett and his partner Charlie Munger also cite Philip A. Fisher as an influence. Fisher was the guy who keeps us hanging on to great companies forever — or at least for a very long time.
To have and to hold
Forward prospects remain attractive for the three firms as we enter 2015:
|
Firm |
Projected earnings’ growth 2015 |
Projected earnings’ growth 2016 |
|
ARM Holdings |
22% |
20% |
|
SABMiller |
9% |
10% |
|
Unilever |
7% |
8% |
The safety cushion of 2014’s capital and dividend gains should make it easy for existing shareholders to hang on to these quality operators. Holding on seems like a good idea. As long as these firms don’t experience deterioration of their trading franchises — the unique set of conditions that give them their edge in their markets — there’s every reason to expect further progress on total investor returns. Imagine, for example, what our holdings may look like in 2024.
When to buy
How should those looking to buy shares in the three firms overcome the natural inclination to shy away because of a high valuation? One tactic is to buy on market weakness and down-days, after thorough research makes us feel happy with each firm’s medium- to long-term prospects.
