Research shows the best way to earn substantial profits from stocks is to hold them for the long term. However, finding these businesses is the hard part. Only a handful of FTSE 100 companies have the kind of qualities required.
These companies are rare, but not impossible to find. There are at least two groups in the lead index that currently look as if they have all the right attributes.
FTSE 100 retail champion
Next (LSE: NXT) is arguably one of the best businesses in the FTSE 100. The company is well managed, has a strong brand, robust balance sheet, and excellent reputation with customers and suppliers alike.
Unlike many of its retail peers, the high street fashion giant also has a robust online presence. In fact, Next’s online sales recently surpassed bricks and mortar sales for the first time.
Next’s forward-thinking mentality has helped the business prosper as many have struggled. The group’s desire to invest to improve its customer offering is also a strong point.
While past performance is no guarantee of future returns, the FTSE 100 company’s transition over the past few years suggests it can adapt and overcome any changes it may face in the future. The organisation has also adopted a conservative-but-liberal approach to shareholder returns. That means it doesn’t pay out funds when it can’t afford to (conservative) but when it can afford it, it’s quite generous (liberal).
Next has been paying out excess profits in special dividends when suitable and buying back stock when the group’s share price looks cheap.
All in all, Next’s attractive qualities compared to FTSE 100 sector peers could help it produce relatively high capital returns over the coming years.
Burberry
FTSE 100 luxury fashion house Burberry‘s (LSE: BRBY) most attractive asset is the company’s brand. Warren Buffett, who is widely considered to be the world’s most successful investor, likes to buy corporations that have strong brands because this competitive advantage helps them stand out in crowded markets.
The Burberry brand is known the world over. This allows the company to charge high prices for its products and earn attractive profit margins.
Companies that make significant profit margins tend to generate better returns for shareholders over the long term. Therefore, as long as Burberry can maintain its brand reputation, the FTSE 100 constituent should be able to generate substantial shareholder returns for many years to come.
That said, it’s clear the company will face some challenges in the near term. It has had to close many of its stores in the coronavirus crisis, and sales have suffered. A prolonged economic downturn could further impact sales.
Still, Burberry entered the crisis with a strong balance sheet and nearly £1bn of cash. This should help the business weather the storm.
While the future is far from certain, Burberry’s strong brand suggests the business is better positioned than most other companies to stage a comeback when the economic recovery gets under way.
