From 6 April 2015, we can load up our ISAs with shares to the value of the new £15,240 allowance.
What should we buy?
In the spirit of Warren Buffett and other great and successful investors, I reckon a quality-led approach to investing can deliver better long-term total returns than a price-led strategy.
Lead by price and we might end up dealing in some ropey old firms that come with hidden dangers. So, it may be better to sift the market for quality companies with great economics and attractive prospects. Once we’ve identified such quality-leaders, we can watch them and wait for a sensible entry point — perhaps during a period of general market weakness, or when some temporary issue knocks the firm’s share price.
With the aim of building a Champions’ League watch list, lets see why Diageo (LSE: DGE), Reckitt Benkiser (LSE: RB) and Shire (LSE: SHP) make the grade.
Consumer brands worldwide
An investment in Diageo backs the firm’s well-known brands such as Johnnie Walker, Crown Royal, J&B, Buchanan’s, Windsor, Bushmills, Smirnoff, Ketel One Vodka, Ciroc, Captain Morgan, Baileys, Tanqueray and Guinness. These addictive alcoholic super-brands have consumer appeal across geographies, and the firm has great potential to expand further into population-dense areas as their economies emerge and mature.
Last year Diageo earned about 37% of its operating profit from emerging markets such as Africa, Eastern Europe, Turkey, Latin America, the Caribbean, and the Asia Pacific, with the rest coming from Europe and North America.
Brand-driven growth
Reckitt Benckiser’s record on growth is a well balanced between revenue, cash flow and earnings. As with Diageo, the strength of Reckitt Benkiser’s business is found in its ‘power’ brands, names such as Dettol, Harpic, Durex, Strepsils, Gaviscon, Vanish, Cillit Bang and Calgon. Such consumer favourites generate brand loyalty from customers and have strong repeat-purchase credentials.
The firm’s recent full-year results revealed steady single-digit progress in profits and the chief executive reckons the firm enjoyed a good year despite challenging market conditions.
Growth in pharmaceuticals
The pharmaceutical sector offers another angle on defensive growth and Shire does a good job of building cash flow and earnings through research and development, and by acquisition. The firm produces a range of medicines and healthcare products in the areas of behavioural health and gastro intestinal conditions, rare diseases, and regenerative medicine, and there’s a strong pipeline of potential new treatments for a diverse assembly of diseases.
Shire operates in the US, UK and Switzerland, and has a network of offices and distribution channels throughout Europe, South America, Canada, and the Pacific Rim. Growth shows no sign of slowing, with the firm labelling 2014 another very good year. Given the increasing strength of the development pipeline, there seems much more to come.
The watch list so far
Including the firms identified in previous articles the ISA watch list looks like this:
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ARM Holdings |
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Unilever |
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SABMiller |
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PZ Cussons |
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Diageo |
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Reckitt Benkiser Group |
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Shire |
