How to Spot the World's Greatest Businesses

Dave Forest's picture

Wednesday, October 21, 2015 - 12:30pm

by Dave Forest

If you've read my premium advisory Top 10 Stocks for any length of time, then you know I like to focus on companies that dominate their markets, that provide a product or service essential to daily life, and that return the bulk of their cash to shareholders in the form of dividends and share buybacks.

As I've mentioned countless times, these core attributes are what form the basis of what I call "Forever" stocks. These are the types of companies that you can buy today and hold for the rest of your life.

Put simply, "Forever" stocks are some of the world's greatest businesses.

And once you know what to look for, it's easy to spot these sorts of companies (and to quickly see which businesses don't fit the mold).

Want some insights into what I look for in a stock? Here are 12 important things I look for when searching for the world's greatest businesses. I urge you to print out this list. Put it next to your computer and refer to it before you buy any stock. There's little doubt it will make you a better investor.

1.) The world's greatest businesses sell their products at premium prices. This all comes down to brand loyalty. Coca-Cola (NYSE: KO) is a great example. Although cheaper alternatives exist, every day roughly a billion people pay premium prices for one of Coca-Cola's products. Thanks to the power of its brands, Coca-Cola has generated some of the greatest returns in stock market history. By contrast, companies that compete solely on price are constantly under pressure to keep prices (and profit margins) low, otherwise they risk losing customers.

2.) The world's greatest businesses sell products used in day-to-day life. Products used in daily life -- like toothpaste, food, and laundry detergent -- are in constant demand. These daily purchases are also harder for a consumer to put off during bad times. But this goes beyond consumer staples. For example, millions of consumers use credit or debit cards multiple times a day, leading to steady cash flow for companies like MasterCard (NYSE: MA).

3.) The world's greatest businesses have a global reach and appeal for their product. A product that only has appeal in a certain region or country doesn't have the same type of long-term growth potential as a truly global product. The world's greatest businesses sell products that consumers love universally across the globe.

4.) The world's greatest businesses are highly scalable. A business should be able to quickly and easily expand. This means having low expansion costs and limited need for specialized or highly trained labor. This is why McDonald's (NYSE: MCD) is so successful. It can staff a new restaurant and deliver the same consistency without specialized, highly-skilled cooks and servers.

5.) The world's greatest businesses sell things that consumers can't live without. Basic necessities like food, water, and utilities will always be in high demand. The same goes for many basic healthcare products and infrastructure assets like roads, bridges, railroads, and ports. And finally, there's another category of products that consumers can't live without -- addictive substances like cigarettes, caffeine, or alcohol.

6.) The world's greatest businesses face little or no regulation. Government regulation increases costs and creates headaches for companies. Regulatory challenges take focus away from a businesses' day-to-day operations.

7.) The world's greatest businesses have unlimited growth potential. Great businesses have a well-defined path that will help them grow revenue and earnings for decades to come. 

8.) The world's greatest businesses dominate their competition. This is one of the most important aspects of a great business. Unless a company dominates its niche or industry, I usually want nothing to do with it. That's why I like Intel (Nasdaq: INTC). The company has a dominant stranglehold on its industry and has gained over 126,000% since its IPO. 

9.) The world's greatest businesses have clear competitive advantages that keep rivals at bay. Competitive advantages -- or "economic moats" -- come in a variety of forms, but it's important that a great business have one or more major moats that keep competitors away. That's why I own master limited partnerships like Enterprise Products Partners (NYSE: EPD) in my portfolio. Another company can't simply come along and build another pipeline next to EPD's lines. That means Enterprise Products doesn't have to worry much about rivals eating into its business.

10.) The world's greatest businesses generate enormous cash flow with low capital spending requirements. The lower the need for capital spending, the more cash a business can deliver to its shareholders.

11.) The world's greatest businesses return billions of dollars to investors in the form of dividends and buybacks. Dividends and share buybacks prove that a company places great importance on generating high returns for its investors. Not only do these actions help put money in your pocket, they also help to smooth out a stock's volatility. This is why every security in my Top 10 Stocks model portfolio either pays a dividend, buys back shares, or both.

12.) The world's greatest businesses have extremely high profit margins, or at least margins that outpace its broader industry. The goal of any business is to generate a profit... but some companies do that better than others. The world's greatest businesses are those that turn the greatest amount of their revenue into profit, which drives share prices, dividends, buybacks, and expansion opportunities.

It will be rare to find a company that exhibits all of these qualities, but this is a good place to start. 

Another good place to start is my latest special report, "The Top 10 Stocks for 2016." 

For example, in this report you'll find a Silicon Valley leader with a massive moat. Back in the early 90s, this company got in early on cell phone technology. It patented much of the technology behind wireless communication. Nearly anyone who wanted to talk on a cell phone had to fork over a royalty to this company.

Over the years, it's secured over 21,000 mobile technology patents, and continues to be one of the top patent filers every year.  As of today, more than 2 billion people already use this company's technology. But over the next few years, that number is expected to jump to 5 billion -- a 130% increase.

That means even if this company merely maintains the status quo, it could soar triple-digits thanks to its stranglehold on the cell phone market.

Another company in my report has seen its share price soar an astonishing 17,000% since 1990 -- that means it has weathered two huge market crashes and 34 months of recessions and still made investors a mint. 

What lies ahead for this company? Well, a certain billionaire money manager recently went public predicting another market crash in 2016. To prepare, he's loading up on millions of shares of this stock...

If you're looking for the right stocks to buy and hold, look no further than my new special report, The Top 10 Stocks for 2016. This annual report is our most popular of all time. 

Since we released the first installment in 2003, we've beaten the market more often than Warren Buffett. Past picks have delivered up to 159% in just one year. Click here immediately to get all the details.

Dave Forest does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.