When looking for investments, I try to focus on what I like to call the market’s best stocks.
These are organisations with a substantial competitive advantage and a track record of developing their advantage further. Indeed, in the past, I have watched many companies lose their competitive advantages due to a lack of investment, poor customer service, and terrible acquisitions. If I can, I want to try and avoid such businesses.
Of course, there is never going to be a strategy that will guarantee success. However, by focusing on these businesses, I can try to swing the odds of success in my favour.
UK stocks to buy
A great example of a business I would buy today is Ferrexpo (LSE: FXPO). This company’s competitive advantage is its cost of production.
In the first half of the year, the miner produced a tonne of iron ore for $46.60. This compared to the average sale price of around $200 for the period.
In recent years, the group has been investing to increase output of its high-grade ore. This has helped it maintain an advantage in a market swamped by low-cost, low quality ore.
The mining company also has a track record of returning significant amounts of cash to investors. The stock currently supports a dividend yield of 4.4%.
Still, despite its competitive advantages, this company might not be suitable for all investors. Commodity prices are highly volatile, and Ferrexpo is controlled by a few key shareholders, which is not the best corporate governance practice.
Despite these challenges, I would buy the stock today.
Market leaders
Spirent Communications (LSE: SPT) and IG Group (LSE: IGG) are two other stocks I’d buy.
Spirent is a leading producer of automated test and assurance solutions for the telecommunications industry.
As the world becomes more digital, the demand for telecommunications services is expanding. And so is the need for Spirent’s services. Revenues jumped 9% in the six months to the end of June. The firm’s order intake rose 14%. These figures have convinced me that I should add the stock to my portfolio.
Management is reinvesting profits back into the business. It recently acquired octoScope Inc, making Spirent the firm leader for Wi-Fi tests in a growing market.
The company may have become a leader in the Wi-Fi testing market, but this is a viciously competitive industry. The group’s biggest challenge is always going to be competition. Spirent has maintained its competitive advantage so far. This may not last if the company does not keep investing.
The same is true of IG. The financial services provider operates in a competitive market. The market is also highly regulated, which comes with additional costs and challenges. Regulators can and have banned the firm’s products.
Despite these risks, I would buy IG for my portfolio. The company has grown to become one of the largest providers of contracts for difference (CFDs) and spread betting in the UK, and it is also expanding around the world. Recent acquisitions have expanded the group’s footprint, especially in the United States, the world’s largest listed derivatives market.
As the company continues to grow, more acquisitions seem likely. These will only reinforce IG’s competitive advantage and growth potential. This is why it sits on my list of the best stocks to buy.
