Three strong firms to buy now

Professional investor Julian Fosh looks for cheap but profitable companies that have built a competitive advantage from intangible assets such as intellectual property. And even in these uncertain times, there are plenty of companies to choose from. Here, he picks three.

Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Julian Fosh, UK equity fund manager, Liontrust.

We look for companies with a competitive advantage. Unlike other investors doing the same, however, we focus on analysing companies' intangible assets. As these assets often don't appear on balance sheets, they can be overlooked by analysts and investors.

Our analysis puts particular emphasis on three specific types of intellectual capital: distribution networks (physical or electronic), recurring income, and intellectual property (patents, copyrights and know-how).

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Having established that a company has demonstrable strength in at least one of these areas, we then look at its historic and prospective returns to ensure this apparent advantage translates into profit. We then assess whether its stocks are cheap. Despite a highly uncertain economic backdrop, there are a number of companies that fit the bill.

Halma (LSE: HLMA) develops, makes and markets health-and-safety products, such as smoke alarms. Many of its brands are world leaders and the company is rich in intellectual property (mostly application expertise).

Recent results confirmed a 9% increase in profits and a remarkable 31st consecutive year of dividend growth in excess of 5%. This prompted earnings-per-share upgrades and propelled the shares to new 12-month highs. Although the company actively seeks to grow, at least in part, by acquisition, it constantly monitors returns on total capital invested which is the right approach.

Despite concerns over the outlook for British government spending following the austerity budget, recent contract announcements from Ultra Electronics (LSE: ULE) illustrate the advantage of diversified revenue streams.

Ultra is an internationally successful defence, security, transport and energy company with a long track record of development and growth. It has built an exceptionally broad range of over 100 niche market positions within its 24 separate businesses.

Since confirming on 23 April that the firm remains on track to make "good progress in 2010 and beyond", Ultra has announced contract wins worth $650m over seven years. These include Battlespace IT systems for the US Department of Defence and, in Britain, £76m for the first phase of the Ministry of Defence's cryptographic modernisation programme.

We didn't need help from the World Cup's psychic octopus to predict that interim results from Domino's Pizza (LSE: DOM), announced on 12 July, would be good. Earnings-per-share growth of 27% was boosted by the World Cup as people stayed home and ordered pizza, but this was just the latest episode in a long-running winning streak.

The secret of the firm's success is a national distribution network of 627 stores delivering freshly made pizza fast (the average delivery time is 23 minutes). This is supported by innovative marketing on both a national and local level. Although it is 25 years since the first store opened in Britain, the company has moved with the times. While the shares have run ahead on earnings-per-share upgrades following these results, sticking with Domino's and its winning formula should see investors profit over the long term.