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As an investor, I like to invest in companies with proven business models. So it may seem like FTSE 100 The index makes a natural hunting ground, due to the abundance of large, well-established businesses.
Even in the FTSE 100, however, there are stocks that perform well and others that perform poorly.
Here are a few things I pay attention to when checking the FTSE 100 for stocks.
1. Focus on the future
Companies are promoted to the leading index due to the size of their market capitalization. In a way, that would make the index look backwards. Slow-growing industries may still be represented, while fast-growing sectors of the economy may not.
For example, consider cigarettes.
He might British American cigars and the rival Imperial Brands be a remnant of the past? Both saw revenue decline last year despite strong pricing power.
2. Sustainability of the business model
National Grid It is a popular choice for income investors, due to its beefy dividend yield and policy of aiming to increase the dividend in line with inflation.
However, I am not the owner of the share. Why? I think the business model is less profitable than it might seem. Supporting it would require additional funding.
Yes, power distribution networks have probably been around for a long time. But maintaining or replacing them costs a lot of money. That helps explain why National Grid has scrambled shareholders this year for cash.
3. Buy the business, not the rumor
As nationally recognized companies, FTSE 100 firms are often the subject of takeover rumours. Buying a foreclosed business can mean a quick profit.
But I see that as speculation, not investing. I only invest in the share because I like its business prospects and current valuation.
4. Always pay attention to balance
When buying any stock, I think valuation is important – and that applies to the FSTE 100 as well.
Think about it Spirax (LSE: SPX), the engineering company with an unbroken annual dividend per share record going back more than half a century.
Business performance has not been very good lately. While revenue was up last year, basic earnings per share fell 18%. With the continued weakness of demand in China, I see some risks for industrial steam and fluid system specialists.
But I still see it as a great company and would happily be a shareholder. It has a large market to address, proprietary technology, a large installed base of customers, and a solid reputation.
But is this FTSE 100 share, down 36% so far this year, worth 20 times earnings?
I don’t think so, that’s why I don’t buy.
5. Think about what makes the company unique
As with any assignment, I look for a competitive advantage that I think helps differentiate the company from competitors.
FTSE 100 firms like Haleon again Unilever they have different product portfolios that give them pricing power.
Billionaire investor Warren Buffett, who tried to buy all of Unilever in 2017, is always looking for a business to be “the canal” that helps it defend against competitors.
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