Never lose sight of the fundamentals.
While we're constantly bombarded with complicated investment jargon, it's important to remember that businesses exist primarily to accept funds from investors and earn a profit.
That is why it makes sense to concentrate on companies that have long-term competitive advantages and can consistently produce strong returns on capital.
“The best business to hold is one that can deploy significant amounts of incremental capital at extremely high rates of return over an extended period of time,” remarked Warren Buffett, CEO of Berkshire Hathaway.
Here are three companies with returns on invested capital of more than 20% that you might want to consider purchasing with some of your spare cash.
Nike is the first to take the stage, routinely generating returns on invested capital in the range of 25% to 30%.
Nike's unrivaled brand strength, economies of scale, and continuous innovation enable the business to retain premium pricing on its products, resulting in continuously outsized returns for investors.
Nike's gross margin climbed 850 basis points to 45.8 percent in the most recent quarter, mainly to stronger volume in wholesale sales and excellent pricing in its direct-to-consumer business.
“NIKE's outstanding earnings this quarter and year highlight the company's unique competitive advantage and deep connection with consumers around the world,” said President and CEO John Donahoe.
Nike's forward P/E is at 37, which is lower than competitors Under Armour (65) and Lululemon Athletica (59), but higher than primary rival Adidas AG (28).
Following Starbucks, we have McDonald's, which has a five-year return on invested capital of 31%, beating out other large fast-food companies like Chipotle Mexican Grill (20%). (8 percent ).
Even in the highly competitive quick-service restaurant sector, the specialty coffee chain's premium-quality positioning and market share dominance allow it to charge much higher prices than other chains, resulting in consistently above-average shareholder returns. Starbucks should have plenty more opportunities to reinvest its capital in the long run as the company continues to grow in locations like China and Japan.
Global same-store sales grew by a stunning 73 percent in the most recent quarter.
“Our ability to move quickly and agilely, as well as our ability to anticipate changing customer patterns, has helped further differentiate Starbucks, putting us in a strong position for this moment,” said Starbucks President and CEO Kevin Johnson.
The stock is down roughly 12% from its June 52-week highs and now trades at a respectable forward P/E of 30, making it a good area for bargain seekers to store their digital nickels and dimes.
Alphabet, the digital behemoth and Google search provider, finishes off our list with a solid 12-month return on invested capital average of 25%.
Alphabet's overwhelming dominance in the internet search field (global market share of more than 80%), diverse portfolio of offerings (including Maps, Google Play, YouTube, and Gmail), and ongoing technological innovation should maintain solid returns and significant cash flow production for years to come.
Revenue grew 62 percent year over year to $62 billion, thanks to increased online engagement and broad-based advertiser expenditure, according to Alphabet's third-quarter data.
“There was a surge in online activity in many regions of the world in Q2, and we're glad that our services aided so many people and businesses,” said Sundar Pichai, CEO of Google.
Alphabet's stock has nearly quadrupled in value in the last year, and it now has a forward P/E of 26.
Even if you disagree with Buffett's stock decisions, you should try to follow his tried-and-true technique of investing in stable assets at bargain prices.
Buffett's personal buddy Bill Gates favors investing in U.S. farmland as a reliable asset.
In fact, Gates is the country's largest landowner, and for good reason: agribusiness has consistently outperformed both equities and real estate in terms of risk-adjusted returns.
This material is for informational purposes only and should not be taken as advice. It comes with no warranties of any kind.
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