Q. What are the marks of great companies?
A. When examining a company, too often people get bogged down in details prematurely. It's vital to evaluate the big picture, to make sure that the company you're looking at is a first-class operation and one you'd be proud to own in your portfolio. Here are some marks of great companies.
Powerful brands. Think of well-known brand names in the United States or, better yet, around the world. Brands like McDonald's (NYSE: MCD), Gucci (NYSE: GUC), Campbell Soup (NYSE: CPB), and IBM (NYSE: IBM) fit the bill. If most people don't yet know a company's name, then it still has a lot of work to do.
Significant products or services. Look for a company that's selling its customers something they really need or really want. Pharmaceutical companies, for example, manufacture products that people will buy whether they're flush with funds or strapped for cash. Firms like Coca-Coca (NYSE: KO) and Starbucks (Nasdaq: SBUX) offer consumers things they love. Look for repeat-purchase products that people buy over and over again, such as cheeseburgers and shampoo, instead of items bought only sporadically, like cars or garbage disposals.
Consistent, reliable earnings and sales growth -- and robust margins. Track how sales and earnings have increased over past years. An upward-sloping line suggests that management is planning and executing well. Stack your company's gross, operating, and net profit margins up against those of its competitors to see which one is wringing the most value out of each dollar of sales.
Lots of potential. See what the company's growth prospects are. Is it expanding abroad? Is it coming out with exciting new products or services? Are its offerings taking the country by storm? Is it trouncing its competition? (Does it even have competition?)
A final consideration when qualifying companies for further research is how well you know the company and industry, and how much you'd enjoy keeping up with its developments. A company might have enormous potential, but if reading about it puts you to sleep, it might not be the best addition to your portfolio.
Also, remember that the only money you should have invested in stocks is money that you won't need for at least five (ideally 10 or more) years. Money you'll need sooner should be in short-term savings. Visit our Short-term Savings Center for more scoop on your options.
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This question and answer is adapted from The Motley Fool Money Guide: Answers to Your Questions About Saving, Spending and Investing. For answers to this and 499 other common money questions, check it out -- it's a handy resource.
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