5 of the Best Businesses to Own

When Warren Buffett speaks, we Fools love to listen. After all, with so many different stock-picking systems out there, it's useful to know exactly what the Oracle himself looks for in a purchase.

In the 1992 Berkshire Hathaway Annual report, for example, Buffett shared this extra-golden nugget of investment wisdom: "The best business to own is one that -- over an extended period -- can employ large amounts of incremental capital at very high rates of return." Simple, right?

In today's info-overloaded financial world, it's easy for investors to forget that companies exist for one basic purpose: to take money from investors and earn a return on it.

It only makes sense, then, to focus our stock search on the best businesses, the ones that generate the highest rates of return.

Return on CAPS
With the help of our Motley Fool CAPS community, I'll attempt to unearth Foolishly loved companies that consistently compound wealth at exceptional clips. In addition to having trailing three-year average returns on capital (ROC) of more than 15%, these stocks have received four- or five-star ratings (out of five) in our database:

So, without further ado:

Data from Capital IQ, a division of Standard & Poor's, and Motley Fool CAPS.

Of course, don't hurry out and buy these stocks just yet. You'll need to conduct some due diligence of your own, considering things like valuation, management quality, and whether its competitive advantages are durable enough to continue posting remarkable returns.

With that said, let me help you get started on two in particular.

Bleacher creature
With all the market turbulence we've been experiencing, focusing on a few blue-chip names might be a smart way to smoothen out the ride. Cleaning products giant Clorox, for example, is steadily becoming one of our community's favorite ways to play defense.

Clorox's stock price is relatively unchanged over the last two months, while the S&P 500 has plummeted more than 10%. Now that's D. Throw in the stock's super-safe, ever-growing dividend -- 2010 marks the 33rd consecutive year of payout hikes -- and you have some attractive total return potential to boot.

Of course, private-label competition from the likes of Wal-Mart (NYSE: WMT) and Target (NYSE: TGT) is only increasing, and the company's business model has always been sensitive to commodity prices. Still, with number-one brands like Clorox, Glad, Pine-Sol, and Kingsford in its portfolio, the company should be able to keep posting above-average returns on capital for years to come.

"Such strong headwinds with currency, taxation, globalization, population increase," wrote CAPS All-Star ipfmanager. "Besides being one of the easiest companies to run and maintain, they will outpace the S&P by the sheer fact that industries shift over time, but everyone needs their ever increasing product line."

Licensed to thrill
Owning powerful consumer brands isn't the only way to carve out a moat. Wireless technology developer InterDigital, for instance, uses powerful intellectual property (IP) to post excess returns -- a business Fools are quite fond of. In addition to being a Motley Fool Stock Advisor pick, the stock has maintained a four-star ranking for over two years straight. 

InterDigital's client roster speaks for itself. Their patents can be found in household wireless device names like Research In Motion, Apple, and LG. In fact, the company was pivotal in developing CDMA (code division multiple access) technology, which has experienced huge market share gains over the last few years.

With the stock selling at a paltry forward P/E of 10, InterDigital also looks like an inexpensive way to play the growth of 3G wireless devices.

"The company's historical roe's are choppy, but the 5 years average is above 40%," wrote CAPS All-Star mrindependent. "The company has loads of cash and [little] debt. It possesses significant patents and seems like an attractive cash cow. Besides all of that, the company is well positioned in the rapidly growing cell phone industry."

The best is yet to come
Businesses that invest in products and services at high rates of return are, quite simply, the best ones to be in. To gain a better feel for the ideas mentioned above, or to pan for even more highly rated, high-return businesses, join Motley Fool CAPS today.

It's absolutely free -- one of the most attractive returns on capital you'll find anywhere.