How to choose high quality listed companies

What are the criteria for a good company?

1. Potential for future development

Stock speculation is speculation, and listed companies with a large potential for future appreciation are the first choice for value investors, that is, potential stocks. In the stock market, compared with the current blue-chip stocks, value investors pay more attention to listed companies that may become blue-chip stocks at some time in the future. Finding future blue chip stocks requires a lot of energy and time in the fundamental research of listed companies, especially in emerging industries that represent the direction of future technological development, such as the new energy industry and the metaverse concept.

2. Irreplaceable

Rare things are precious, and listed companies that are irreplaceable and impossible to replicate are also important choices for value investors. The market is only afraid of industries that get together, no matter what product, if there are more manufacturers, there will inevitably be competitive price cuts, and profit margins will be compressed. When a listed company is irreplaceable, it means a certain sense of “monopoly”, thus ensuring long-term profit growth. Just like Moutai, because of its unique financial attributes, it has the function of maintaining and appreciating value, so it has grown into a super enterprise with a market value of 2 trillion yuan.

3. Have an advanced corporate culture

The corporate culture of listed companies is accumulated over a long period of time. To have an advanced corporate culture, there must be a strong management team and a modern management system. Evaluate whether the company’s management team has rich experience, outstanding capabilities, and long-term planning and execution capabilities for the company. Understanding the company’s core management personnel, board members, their background and past performance is crucial to judging the stability and sustainability of the company’s future development.

According to what kind of conditions to choose these good companies?

1. Leading and monopoly companies

Leading and monopolistic companies or companies with a large share in a segmented market. U.S. stocks have a large proportion of institutions, and companies that fail to win the favor of institutions will have a hard time getting ahead no matter how low the price is. Therefore, stocks of this type such as Tesla, Facebook, Amazon, etc. should be the first choice. Chinese concept stocks are also a very good choice, because behind them is China with rapid economic development. The dividend of rapid economic development has not faded, and more mainland companies will enter the US stock market in the future.

2. Companies with a certain share price and market value

The proportion of U.S. stocks delisted is relatively large, and low-value stocks are easier to delist than leading stocks. According to statistics, during the decade from 1995 to 2005, a total of 9,273 companies in the three major US stock markets were delisted. Among them, a total of 1,906 companies were delisted from the New York Stock Exchange in ten years, 6,257 companies were delisted from Nasdaq, and 1,010 companies were delisted from the American Exchange in ten years. During the five years from 1997 to 2001, the three major stock markets delisted an average of about 1,000 companies each year. About half of these are voluntary delistings, mainly privatizations; the other half are forced delistings. Investing in U.S. stocks must avoid the risk of U.S. stock delisting.

Second, look at the company’s fundamentals and the company’s organizational structure. Generally, the selected companies must have a clear main business, only one main business, and no more than two main businesses. Unless it is a capital platform integration type that can operate across industries, companies with more than three main businesses are never considered. Only by focusing can we go further. Whether it is Amazon or Tesla, their main business is very single.

3. Understand the main business

In-depth analysis of a company’s main business. The value of a company is the discount of future free cash flow. Free cash flow is closely related to operating cash flow, and operating cash flow depends on the difference between “coming money” and “spending money”. The upstream of a company’s industry is " In the direction of spending money, the downstream is the source of “coming money”. The relationship between an enterprise and its upstream and downstream determines the profit model of this enterprise. If you don’t know how the company’s business makes money, you don’t know how to make money yourself, and the result is that you lose money in the end. Only after we have peeled off the cocoons can we be qualified to talk about value investing and how to advance and retreat with the company.

4. The industry is clear

Choose an industry you are familiar with. As we grow older, our experience will become richer and richer. We will have our own cognition and views on things, and it will be easier to pay attention to the industries we care about, such as Internet e-commerce, game IP, and national short video live broadcast. etc. Especially in the industry you are in, familiarity with the industry will make it easier for you to get in touch with the essence of the industry, and the role of intrinsic value will be infinitely magnified. Whether it is in terms of time or energy, it has a very big advantage. Understand the position of the invested company in the industry and its competitive advantages, such as market share, technology leadership, brand value and patents, etc. Good companies are often able to maintain a competitive advantage in a highly competitive market and are expected to achieve long-term growth.

What else should a high-quality company look for?

1. Look at performance

Evaluating a company’s profitability and financial status is an important indicator for selecting high-quality listed companies. Pay attention to the company’s revenue growth, profit level, balance sheet and cash flow and other indicators to ensure that the company has stable profitability and good financial health. Review the company’s annual and quarterly reports, including income statements, balance sheets, and cash flow statements. These statements provide detailed information about a company’s revenues, expenses, assets, and liabilities. Focus on the company’s total revenue and net profit. Gross revenue reflects what a company earns from selling products or rendering services, while net profit shows how much a company earns after deducting all expenses and taxes. Examine the company’s gross and net profit margins. Gross profit margin refers to the ratio of gross profit after the company sells products or provides services to total revenue, and net profit margin refers to the ratio of net profit to total revenue. These indicators can reflect the company’s profitability and operating efficiency. Focus on the growth rate of the company’s revenue and profits. By comparing the data of different years or quarters, you can understand the development trend and growth rate of the company’s business. Other industry-related indicators can also be considered, such as earnings per share (EPS), price-earnings ratio (P/E ratio), asset turnover ratio, debt ratio, etc.

2. Strategic Planning and Outlook

Research the company’s strategic planning and development prospects. Consider whether the company’s product line or service is in line with trends and market needs, and whether it has the potential for continued growth in the next few years. Learn about the industry in which the researched company operates and provide an in-depth analysis of the industry. Including industry development trends, competitive landscape, market size, supply and demand and other factors. Research the company’s business strategy, market positioning and core competitiveness. Evaluate whether the company has a good strategic plan and long-term development vision. Analyze the competitiveness and differentiation characteristics of the company’s products or services in the market. Understand the company’s core products, technological innovation, R&D strength and comparative advantages with competitors. Carefully study the company’s financial statements and related metrics such as revenue growth rate, net profit margin, balance sheet, etc. Assess the company’s earning potential and financial stability. Evaluate the prospects and growth potential of the market in which the researched company operates. Consider factors such as market size, consumer demand, and competitive situation to determine whether a company can adapt to market changes and maintain a competitive advantage. Ensure that the information obtained comes from reliable sources, such as financial statements, industry research reports, public information, etc. Try to avoid over-reliance on a single source of information and maintain diversity and objectivity.

3. Risk management

Assess the company’s risk management capabilities and anti-risk capabilities. Find out if the company has the ability to systematically identify potential risks and conduct a comprehensive risk assessment. This includes the identification, quantification and assessment of various risks that may arise in the internal and external environment. Research whether the company has a clear risk management strategy and policy in place and incorporates it into day-to-day operations. Understand the company’s attitude and handling methods for different types of risks, as well as the risk awareness and bearing capacity of relevant decision-makers. Evaluate the soundness and effectiveness of the company’s internal control system. Pay attention to the company’s organizational structure, process, authority distribution, information disclosure, risk monitoring and internal audit, etc., to ensure that risks can be discovered, reported and responded to in a timely manner. Research the company’s response capabilities and handling methods when risk events or crises occur. Learn about the company’s contingency plans, business continuity plans, and how it communicates and collaborates with suppliers, customers, and stakeholders. Assess the company’s corporate culture and ethical risk management. Understand whether the company pays attention to integrity, compliance and ethical standards, and establish corresponding supervision and accountability mechanisms to prevent potential risks such as internal corruption and misconduct. Consider the external environmental risks of the company’s industry and market, such as the potential impact of policy changes, economic fluctuations, natural disasters and other factors on the company’s operations. Understand the company’s awareness and readiness for these risks. Pay attention to the company’s management of financial risks, such as liquidity risk, exchange rate risk, credit risk, etc. Research a company’s financial statements and financial metrics, and assess its funding structure, solvency, and financial stability. Understand the company’s past risk incident handling and response. Study the company’s historical record and strategic adjustments to assess the company’s ability to learn and improve in the face of risks.

4. Valuation and return on investment

Consider whether the valuation level of the company is reasonable, and combine your own investment objectives and risk tolerance to evaluate whether investing in the company has a reasonable return on investment potential. Assess the company’s profitability and growth potential. Pay attention to the company’s revenue scale, profitability and expected future growth rate. Use profit indicators such as price-earnings ratio (PE ratio), price-to-book ratio (PB ratio), etc. as a reference. Compare the company’s valuation with that of its industry competitors. Understand its relative position and competitive advantages, and determine whether the company’s valuation is higher or lower than the average level of companies in the same industry. Research the company’s cash flow situation, especially free cash flow. Free cash flow can measure the company’s solvency, investment ability and dividend potential, and has an important impact on the company’s valuation. Assess the market outlook of your industry and the company’s competitive position in the market. If the company is in a high-growth industry or has unique product or technology advantages, it may support a higher valuation. Consider the company’s brand value, popularity and asset quality. Companies have brands, patents, or other intangible assets with competitive advantages that may support higher valuations. Review analyst earnings forecasts and related reports to understand the company’s growth expectations and risk factors. Higher risk factors may affect the reasonableness of the company’s valuation. Consider the sentiment of the market and what investors expect from the company. Market sentiment can cause a company’s valuation to deviate from its fundamentals, but changes in investor sentiment can also present investment opportunities.