Investing in uncertain markets
Quality Companies, at reasonable prices, is a sound cornerstone for every portfolio.
The US stock markets is at historic highs, with the S&P 500 hitting all-time highs in April 2024 with 23% of stocks in the S&P 500 trading at price earnings multiples of over 30 times. Where do you find investments for the long term, that will provide satisfactory returns given current valuation levels?
An answer lies in 1) quality companies, 2) at reasonable prices.
First, the easier part: Quality companies are those business that generates increasing amounts or free cash flow, annually, with capable management that have a track record of applying this additional cash in the best interest of shareholders.
The key is in the consistent and growing cash flow generation, such companies normally have the following characteristics:
Enduring, competitive advantage,
Outstanding management whose interests are aligned with shareholders,
Evidence of great capital allocation over the years,
High profitability,
High cash generation and conversion,
Low capital intensity,
A record of strong growth,
In an end market with a high probability of growth.
Identifying great companies is what we do at Celestial, with our investable universe currently comprising 90 global companies, of which 12 is in our portfolio. Some examples of current and former portfolio companies include Adobe Inc, Novo Nordisk, Microsoft, Visa, Copart and Fortinet.
Populating the investable universe is the relatively easy part, identifying those companies that will deliver free cash flow commensurate with their current valuations is more challenging!
An area where there is current opportunities to acquire quality companies at reasonable prices is in the smaller capitalisation companies, European companies and certain dividend growth companies. Expect to see some in the portfolio soon.
We will be featuring selected Quality companies in upcoming posts and discussing whether their current valuations make them attractive acquisitions or not.