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As an investor, I like to invest in companies with proven business models. So it may seem that the FTSE 100 index is a natural hunting ground, thanks to its large number of large and well-established companies.
However, even in the FTSE 100 there are some stocks that do very well and others that do terribly.
Here are some things I pay attention to when looking for stocks to buy in the FTSE 100.
1. Focus on the future
Companies rise to the leading index due to the size of their market capitalization. In some ways, that can make the index rather backward. Mature, declining industries may still be represented, while fast-growing sectors of the economy may not be.
As an example, consider tobacco.
Could British American Tobacco and rival imperial marks Could they be remnants of a bygone era? Both saw revenue declines last year despite having strong pricing power.
2. Sustainability of the business model
National Network It is a popular pick among income investors, thanks to its strong dividend and its policy of aiming to grow the dividend in line with inflation.
However, I do not own the stock. Because? I think the business model is less lucrative than it seems. Sustaining it could require more money.
Yes, power distribution networks are likely here for the long term. But maintaining or changing them requires a lot of capital. That helps explain why National Grid diluted its shareholders this year to raise cash.
3. Buy the business, not the rumor
As nationally recognized companies, FTSE 100 companies often feature in acquisition rumours. Buying a business that is later taken over can mean a quick profit.
But I see it as speculation, not an investment. I invest in stocks only because I like their business prospects and current valuation.
4. Always pay attention to the rating
When buying any stock, I think valuation is important, and that goes for the FSTE 100 as well.
Consider Spirax (LSE: SPX), the engineering company that has an unbroken record of annual dividend per share increases dating back more than half a century.
Business performance has not been stellar lately. While revenue hit an all-time high last year, core earnings per share fell 18%. With continued weakness in demand in China, I see more risks for the industrial steam and fluid systems specialist.
But I still see it as a great company and would happily own the shares. It has a sizeable target market, patented technology, a large installed customer base and a strong reputation.
But is this FTSE 100 stock, which is down 36% so far this year, worth more than 20 times earnings?
I don't believe it, that's why I don't buy.
5. Consider what sets the company apart
As with any stock, I look for a competitive advantage that I believe helps differentiate the company from its rivals.
FTSE 100 companies such as haleon and Unilever They have unique brand 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 have a “pit“That helps him defend himself against his rivals.
