4 Ways to Find Winning Long-Term Investments
Investors are constantly searching for great investments that can help compound their money over years in order to build up a comfortable retirement nest egg for themselves. The problem lies in identifying companies that consistently have an edge and are able to grow their revenue, profit, and cash flow over the long term.
Many companies may outwardly display such characteristics, but the investor has to be mindful of value traps — investments that seem good on the surface but may turn out to be stinkers in the future. It’s important to monitor investments to ensure the original investment thesis continues to be on track and the risks are contained or mitigated.
I rely on four methods to find great long-term winners. I believe these four aspects should stand investors in good stead to find growing companies that can compound their wealth.
1. Growing total addressable market
The first method is to search for companies with growing total addressable markets (TAM). In short, TAM represents the revenue opportunities for companies within a certain industry. If the TAM is large and growing, this implies there are ample opportunities for companies within that industry to enjoy multiyear growth, assuming they carry out appropriate business development and engagement initiatives.
This is in contrast to a company with a shrinking TAM, as that company will struggle to grow revenue and profit on a year-on-year basis. To give an example, Riverstone Holdings Limited (SGX: AP4) has a growing TAM as more and more countries improve their healthcare facilities and require more rubber gloves.
2. Consistent free cash flow
The second method relies on consistent free cash flow generated by a stable business. With such stability and consistency, investors can rest assured that their investment will not go off the rails. A great example of this is VICOM Limited (SGX: V01), which has generated very consistent and regular free cash flow for many years. This underscores the group’s ability to extract great cash flow from its business, which provides assurance of the company’s quality.
3. Increasing dividend payments
If a business has been increasing its dividends over the years, this implies the underlying business must be showing improved performance. The main reason companies bump up their dividends is because management is confident future growth will be able to fund the rising dividend. This sends a signal to investors that the company is on track for better days ahead.
An example is SATS Limited (SGX: S58), which has raised its dividend per share for five years running.
4. Astute and prudent management team
The final method is to look out for an astute and prudent management with a long-term business horizon. This is more of a human aspect rather than a purely quantitative approach, but it’s important as it can determine if an investment performs well or not over the long term.
Management who are brash and go for quick, unsustainable market share gains tend to prioritise growth over prudence. This may cause the company to rise quickly but burn badly if things fall apart.
An example of a company with prudent management is Boustead Singapore Limited (SGX: F9D). The management team always ensures there is a sufficient cash pile on its balance sheet, which helped tide the group over during the Global Financial Crisis of 2008 and 2009.
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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore has recommended shares of Boustead Singapore Limited, VICOM Limited, SATS Limited, and Riverstone Holdings Limited. Motley Fool Singapore contributor Royston Yang owns shares in Boustead Singapore Limited, VICOM Limited, and SATS Limited.