FINDING STOCKS TO HOLD VERY LONG TERM
IMO, there are some things to look for when considering buying a stock for holding a very long time. I am keeping this separate from what I would call a long term hold, as I break my l/t positions into these 2 categories. The long term stocks I do plan to change some time where as the very long term I do not plan to get rid of, though I could always change my mind...
Ok, first and foremost on these very lt holds is CASH. Without cash and continual influx of more available cash, there can be no money for dividends, R&D, new product development, entering new markets, reducing debt, making acquisitions....you get the picture. I am more receptive to companies already paying a good div., but will not exclude those who don't IF they meet all my requirements. So let's talk cash...
When talking about their cash, I am mainly interested in their FCF - free cash flow. For those unfamiliar with this term, the calculation for it is :
Net Income + depreciation/amortization less their capital expenditures and changes in their working capital.
If anyone has trouble with that formula just ask.
I like to see FCF in the 300M or more range - that gives me the sense of security knowing that this company can survive most anything that comes its way, and can continue to grow. Equally important, I want this company to project that over the next several year this FCF will continue to increase.
In addition, I like Buffetts 15% approach, that being that the company has a net profit margin of at least 15% and at least 15% return on equity oover the last 5 years. Again, security of producing cash leading to future good things!
That's is about it for the math part, but other things are very important. Something I do like to see is the barrier to entry from competition (another Buffett concept). As I mentioned in an earlier post, it is very hard to start a railroad! Whether it is because of enormous start up costs, patents, brand name or whatever it is, if a company is in a position to keep out new competition and meets the math criterias mentioned above, it is looking good!
If a stock meets all of these, then I will look at some other things to make the decision, but I have nothing written in stone. I do like it when there is little debt, global revenues, uptrend in earnings and a company that has been around a while.
Well that's my opinion, what about yours??
