The best way to invest is with a portfolio of the highest-quality growth businesses that can deliver sustainable, above-average earnings growth over the long term. Such exceptional companies not only have the potential to contribute outsized returns, but are also inherently less risky, as their greater earnings stability and financial strength offer a “margin of safety” that typically results in less volatility during turbulent market environments.
Europe’s software powerhouse
SAP (Frankfurt: SAP) is one of the world’s leading enterprise-software providers and a trusted partner for over two-thirds of Forbes Global 2000 companies. Its systems underpin 77% of the world’s transactions. The pandemic has demonstrated the resilience of the business as customers have seen how valuable SAP’s products are. SAP has a powerful combination of a fast-growing cloud business and a solid core suite of solutions. The stock is attractively valued and given the high switching costs and mission-critical nature of its services we expect SAP to continue to perform strongly.
China’s digital leader
Alibaba (Hong Kong: 9988) is the backbone of e-commerce in China and is very well positioned to continue attracting customers as Chinese consumption grows. The popularity of its core commerce marketplaces – Taobao and Tmall – has allowed Alibaba to establish a dominant position where it benefits from the dual tailwinds of digital-advertising growth and increased e-commerce penetration. Unlike Amazon, Alibaba operates a third-party marketplace model, meaning it does not carry any inventory. That allows the business to expand with limited capital requirements.
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All this has resulted in high operating margins and strong free cash-flow generation, which Alibaba has reinvested into areas that bolster its business, such as payments (through its stake in Ant Financial), a smart-logistics platform, food delivery, offline retail and cloud computing. Some of these newer businesses, such as AliCloud and Cainiao (logistics) are now large enough to start contributing more to overall earnings.
A secular tailwind for pharmaceuticals
Abbott Laboratories (NYSE: ABT) has a diversified portfolio of stable, high-quality growth businesses. The group’s excellence in innovation has enabled it to lead each segment in which it operates. A key growth driver is the FreeStyle Libre device for diabetes care, which in terms of both revenue and patients is the world’s leading continuous glucose monitor. Libre users are doubling each year. Key elements of its appeal are its ability to eliminate the need for finger-pricking and its pricing strategy.
Heart health continues to dominate healthcare and Abbott’s innovative cardiovascular device portfolio bodes well. It is led by MitraClip, a minimally invasive treatment for mitral regurgitation (when blood leaks out of one of the heart’s valves).
Lastly, Abbott’s Alinity diagnostic instruments (which played a leading role in Covid-19 testing) are engineered to be faster and simpler to operate than the division’s previous products. The group also benefits from the secular tailwind of a growing middle-class population in emerging markets, where Abbott makes 40% of its revenues.
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