Great stocks share three winning traits:
- They're self-funded. Top stocks produce bushels of free cash flow. ExxonMobil (NYSE: XOM ) and Pepsi (NYSE: PEP ) are perfect examples of this. Combined, they've produced around $50 billion in FCF over the past 12 months alone.
- They're growing fast. Big winners tend to attract customers and produce massive revenue growth, as offshore drilling contractor Transocean (NYSE: RIG ) has over the past five years.
- They possess sustainable advantages. Great stocks have the chops to fund growth and expand margins. Think of Apple (Nasdaq: AAPL ) and its near-monopoly in online digital music. Or Diageo (NYSE: DEO ) and its dominant liquor brands.
Every one of these firms is a great business. I highlight them here because history proves that, while low-priced businesses can make for good returns, reasonably priced great businesses can make you rich.
Cheap stocks, cheap returns
Consider Google. When the search king was preparing for its August 2004 IPO, hundreds of stocks sold for less than 15 times earnings