Some people want to “play” the stock market like it’s some sort of casino, buying and selling stocks daily and hoping to make a quick profit. This is the wrong approach. Trying to predict daily stock price movements represents an impossible task and what little profits you do make can be eroded by commissions and/or capital gains taxes.
It’s best to view stocks as a way to own businesses. Excellence businesses earn revenue and profits consistently over the long term with superior share price advancements following suit; which you would miss out on by constantly trading in and out of positions.
Before you begin searching for excellent businesses ask yourself the following questions:
1.) Does the company sell a needed product?
2.) Does the company possess high barriers to entry (a wide moat)?
3.) Is the company a market leader?
4.) Does the company possess solid fundamentals?
The three companies below would get a “yes” answer to at least three of the four questions.
You have to get it there to sell it
Western railroader Union Pacific Corporation (NYSE:UNP) provides the essential function of moving goods from one place to another. It would take billions of dollars for someone to build the infrastructure necessary to start a new railroad. Union Pacific is one of two major railroads west of the Mississippi with Berkshire Hathaway’s Burlington Northern Santa Fe serving as its only major competitor.
Despite falling volume, increased prices gave a boost to Union Pacific Corporation (NYSE:UNP)’s top and bottom lines. On the fundamental front, Union Pacific grew its revenue and free cash flow 3% and 24% in its most recent quarter. The company’s long term debt to equity ratio stands at a reasonable 46%. As an added bonus Union Pacific pays out roughly half of its free cash flow in dividends at $2.76 per share, equating to a 1.7% dividend yield.
Union Pacific Corporation (NYSE:UNP)’s diverse revenue sources give the company a leg up over other railroads whose biggest source of income comes from a single commodity such as coal freight. The housing recovery and the domestic petroleum and natural gas boom should boost freight revenues in Union Pacific’s industrial products and chemicals.
It won’t go without parts
Wabtec’s relationship ties to the rail industry, and the technical know-how and capability that go into its parts and services provide a hefty barrier to entry for any potential competitor. Wabtec holds a 50% market share in North America making it a definite dominant player at least in North America.
Wabtec grew its revenue and free cash flow 6% and 389% respectively in its most recent quarter. Its long term debt to equity ratio stands at 31%, well below my personal threshold of 50%. In a recent bullish move Wabtec boosted its dividend 60% and affected a 2 for 1 stock split. While the split won’t change the overall value of the shares it does reflect faith and confidence in the company from its senior management.
Looking to the future, Wabtec makes environmentally friendly locomotives which should trend well in a more global market place marked with increasing concern for the environment. In addition, Wabtec shareholders should continue to see top and bottom line growth as the rail industry benefits from the continued housing recovery and the domestic natural gas and petroleum boom.
When you’re looking for a get away
Entertainment conglomerate The Walt Disney Company (NYSE:DIS) hardly makes products and services you can live without. However, the experiences that its parks, resorts, and movies provide appeal to a huge market of people wanting to escape the daily doldrums of life. In recent years, Walt Disney built a large portfolio of science fiction and fantasy powerhouses through the acquisitions of Pixar, Marvel, and Lucasfilm.
Disney via Marvel and Lucasfilm own some of the most well recognized names in history such as Spider-Man, Iron Man, Star Wars and Indiana Jones. The rich history behind these brands and their resulting success make them hard to duplicate.
The recent Iron Man blockbuster shows this company can dominate the science fiction world in addition to the sports world through its ESPN ownership.
In the most recent quarter, Disney increased its revenue and free cash flow 10% and 75% respectively, quite a feat for such a large company. Most of its gains in revenue came from the Parks and Resorts, Studio Entertainment and Consumer Products segments. Theme parks and toys benefit from the blockbuster status of the movies on which they are based.
Shareholders can expect new movie blockbusters down the road with the upcoming new Star Wars movie in addition to the new movies created from its powerful Pixar subsidiary and the myriad of Marvel characters out there. Disney knows how to create experiences. This core competency shouldn’t change anytime soon.
