High-quality UK businesses can be identified by several indicators and their stocks tend to have elevated valuations.
Quality is a ‘thing’ in the world of investing. And it’s one of the factors that can drive returns for investors over the long run. Other factors include value, momentum, size and volatility, among others.
Quality plus growth
Quality can work alongside the growth prospects of a business to create long-term gains for shareholders. And it’s perhaps the main ingredient powering super-investor Warren Buffett’s success since he’s been managing capital measured in billions of dollars.
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But the often-high price of quality can deter investors from great businesses for long periods. And that can be a good thing because sometimes paying too much for a stock in valuation terms can turn a great business into a poor long-term investment. That’s because over-pricing tends to correct in the end.
So it’s often a good time to become interested in quality stocks when the market becomes pessimistic and starts marking down their valuations. And that’s been happening recently with many of those listed in London.
It’s a good time to dig in with deeper research and consider some of these opportunities for inclusion in a diversified portfolio.
A top biopharmaceutical opportunity
For example, science-led biopharmaceutical company AstraZeneca (LSE: AZN) has dropped by around 14% over the past month. And with the share price near 10,302p, the stock is around 8% lower than it was a year ago.
But the business powers on. And City analysts expect solid advances in earnings and shareholder dividends ahead. However, the valuation is now cheaper than it was recently.
There’s always the risk that the vibrant Research and Development (R&D) pipeline could dry up. But in April, the company said the business started the year well. And there’s been a good flow of positive announcements this year so far.
I’ve wanted AstraZeneca in my long-term portfolio for a long time. And I reckon the stock is worth serious consideration now.
A successful expansion story
However, I’d also consider adding to my holding in global luxury goods manufacturer, retailer and wholesaler Burberry (LSE: BRBY). The company is known for high-end fashion and has been making big strides exporting the idea of ‘Britishness’ abroad, such as in Asia.
With the share price near 2,106p, it’s down by about 20% since April. Although it’s still around 27% higher than a year ago.
Earnings, cash flow and dividends have been growing steadily and there’s no sign of any weakness in the figures.
However, there’s no denying the business is vulnerable to general economic cycles. And it would likely suffer if a downturn gathered strength in the months ahead.
Nevertheless, as recently as May, the directors were upbeat about the outlook. And I think there’s a good chance that recent negative investor sentiment might have driven down the share price unfairly. For me, the weakness signals opportunity.
