11 Essential Traits of "The World's Greatest Businesses"

Bob Bogda's picture

Tuesday, October 2, 2012 - 11:30am

by Bob Bogda

Just this week renewed anxieties about Europe again weighed on stock prices in the United States. These concerns resulted in the longest market losing streak -- five days -- in two months.

Even mighty Apple (Nasdaq: AAPL) fell more than 6% during the slide. Do you think the investor who bought Apple at the all-time high of $705.07 a share last week is getting a little nervous? (Apple is now below $670 per share.)

There's still no resolution to the uncertainties that have plagued the market off and on all year. And these ongoing worries have prompted some analysts to call for a pullback of fairly major proportions -- especially after both the Dow and the S&P touched multi-year highs this month. Consider this headline from CNBC.com at midweek: Beware the Coming 25 Percent Correction: Pro.

Truth is, trying to predict the market day-to-day is an exercise in futility. But if the market does experience another downturn, how will your portfolio handle it?

Few stocks would escape a sizeable broad-based market drop unscathed. But there's no doubt that some stocks would hold up better -- and yes, even move higher -- in a downturn. In fact, researchers at StreetAuthority recently uncovered a special class of companies that have already sailed through past market storms over the long haul.

Top 10 Stocks Chief Strategist Paul Tracy calls these investments "the World's Greatest Businesses," or "WGBs" for short. During the past decade, when many investors were cashing out of losing positions during times of volatility, this group of just 12 stocks was actually making investors wealthier.

In the 10 years ended June 30, the 12 stocks Paul tagged as WGBs gained an average of 181.2% -- nearly triple the S&P 500's 68.1% return over the same time span. And during the past five years, these stocks returned 68.4% on average, compared with just a 1.1% gain in the S&P.

So what are their names?

One of those companies is Starbucks (Nasdaq: SBUX), which Paul added to his Top 10 Stocks real-money portfolio this summer.

What makes Starbucks one of the World's Greatest Businesses? When I first wrote about Paul's findings, he explained it this way:

"Starbucks sells a product that has global appeal. It sells a product at a premium price. It faces little to no regulation. And Starbucks also returns billions of dollars to its investors via buybacks and dividends."

It's little surprise the shares are up 111% in the past five years. That's the power of investing in great businesses.

There's little doubt you've thought about the potential of Starbucks as an investment while standing in line for a latte. But not all of these companies are as highly visible.

Take Cisco Systems (Nasdaq: CSCO), another one of Paul's World's Greatest Businesses. When it comes to rewarding stockholders and increasing the value of its shares, this maker of computer networking equipment has few rivals.

Cisco's share count peaked in 2001 with more than 7.3 billion shares outstanding. But over the last 11 years, the company has bought back over $76 billion worth of stock. Today that share count is 5.3 billion -- a decrease of more than 25% during the past decade. And just last month Cisco announced it was raising its quarterly dividend 75% to $0.14 a share.

While Cisco's shares have underperformed for years, the pressure of an increasing dividend, rising earnings and billions in buybacks now appear to be working their magic. Since the announcement of the dividend increase a few weeks ago, the stock is already up 10%.

But just because a company buys back shares and pays fat dividends, it's doesn't necessarily mean it's an investor's best friend. In order to really be considered one of the World's Greatest Businesses, a company needs to possess many other traits, like unlimited growth potential... high profit margins... and the ability to dominate the competition, just to name a few.

That's why Paul has put together a list of 11 traits that investors should look for when searching for great businesses of their own. As he explained in a recent issue of Top 10 Stocks, if you focus on companies with the traits on the list below, chances are you'll become a better investor.

I urge you to print this list out, set it by your computer and consult it every time you're thinking about making an investment decision...

1.) The World's Greatest Businesses sell their products at premium prices.

2.) The World's Greatest Businesses sell products used in day-to-day life.

3.) The World's Greatest Businesses have a global reach and appeal for their products.

4.) The World's Greatest Businesses are highly scalable.

5.) The World's Greatest Businesses sell things that consumers can't live without.

6.) The World's Greatest Businesses face little or no regulation.

7.) The World's Greatest Businesses have unlimited growth potential.

8.) The World's Greatest Businesses dominate their competition and have clear competitive advantages that keep rivals at bay.

9.) The World's Greatest Businesses generate enormous cash flow with low capital spending requirements.

10.) The World's Greatest Businesses return billions of dollars to investors in the form of dividends and buybacks.

11.) The World's Greatest Businesses have extremely high profit margins, or at least margins that outpace their industry averages.

Action to Take --> Now, it's rare that any company will have all the characteristics I just listed.

For example, cigarette companies sell addictive, high-margin products. As a result, companies like Altria (NYSE: MO) and Philip Morris International (NYSE: PM) have been some of the stock market's best performers... delivering gains of hundreds of percent over the years. On the other hand, both companies face stiff regulation.

Meanwhile, a fast-food restaurant like McDonald's (NYSE: MCD) has a scalable business, but it doesn't sell its products at premium prices.

That doesn't mean it isn't a great business... or a great investment. McDonald's stock is up more than 300% in the past decade. (While both McDonald's and Altria are great investments, they didn't make the cut as one of the 12 WGBs.)

But the more of these characteristics a company has, the more likely it will not only beat the market, but will continue earning you money year after year... even if we do end up getting that correction.

[Note: Collectively, the 12 stocks of the World's Greatest Businesses make up an investment "fund" Paul calls The Public "WGB Retirement Fund." While this might not be your traditional index or mutual fund, history shows that if you had owned this "fund" over the past decade, then you would have handily beaten the market. At the same time, many of America's largest retirement pension funds are investing billions of dollars in these stocks. To learn more -- including several names and ticker symbols -- follow this link now.]

Bob Bogda does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC owns shares of SBUX, CSCO, MO, PM in one or more of its “real money” portfolios.