We live in an increasingly short-termist world, awash with information and demands for instant gratification. But successful investing is often about patience. I believe there is an edge to be gained in owning stocks for the long term where no immediate catalyst can be identified.
We seek out quality companies that achieve sustainably above-average returns on invested capital. This attribute is particularly rewarding when combined with growth that allows for a compounding effect, as the cash generated by such companies is either reinvested in the business, or returned to investors for reinvestment.
Identifying such companies isn't simple, but the real challenge is buying at the right price. Such valuation opportunities are usually created by a short-term disappointment or at a time when the long-term attractions are overlooked by a myopic market.
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Monsanto (NYSE: MON) produces seeds and crop protection chemicals that are sold to farmers to enhance crop yields, most notably in corn and soybeans. Genetically modified seeds are controversial in Europe, but are widely used in the Americas. They are likely to be accepted elsewhere in the world, as the challenge of feeding a growing global population must be met by raising agricultural productivity.
Monsanto's technology lead and scale mean it achieves high returns and impressive profit margins. A period of new product launches, such as Intacta for soybeans in Brazil, has just begun. This should see sales grow at a high single-digit rate in the years to come.
Some uncertainty over how these new products are being received has caused the shares to pause for breath, but once the excess cash on the balance sheet is accounted for, the stock could offer compelling value for a long-term investor.
UBM (LSE: UBM) is the largest quoted events-led media business. It runs more than 400large-scale exhibitions in over 30 countries.In a digital world these events provide essential opportunities for companies to meet their clients face to face. UBM's events division achieves margins of over 30% with little capital employed.
In recent years the company has undergone a costly restructuring, shedding its less attractive print media assets. But this process is now coming to an end and over time the solid growth and cash generation of the core business should be revealed. This leaves the shares looking increasingly compelling.
William Hill (LSE: WMH), Britain's leading bookmaker, can hardly claim to have been out of the limelight with investors. The industry has been hit by government tax hikes and the threat of tighter regulation on gambling machines, while sports results have been unfavourable to bookies.
The run of luck for the punters is unlikely to last, but the potential for a harsh regulatory ruling on fixed-odds betting terminals is a clear uncertainty, which may not be resolved before the end of 2014.
However, we believe the real value in William Hill is its online sports-betting business, which is growing rapidly and now accounts for more than 40% of group profit. With the potential to expand further internationally, this division alone could be worth the entirety of the current market cap.
These stocks represent a compelling blend of industry-leading positions, high and rising returns on capital, growing markets and the scope to return excess capital. It is hard to anticipate when the stocks will find favour with the market again, but the risk-reward profile is tilted in favour of patient investors.
Jeremy Thomas is co-manager of the Brunner Investment Trust (LSE: BUT).
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