It can be unnerving to see as much volatility on the stock market as we are seeing now. However, the Motley Fool’s message strikes me as a good one: keep calm and carry on investing. Foolishly.
Many investors run a watch list of quality firms they’d like to buy, and there isn’t a better time to revisit it than when share prices are weak, such as right now.
Of course, we shouldn’t buy indiscriminately, just because share prices have fallen a bit. But if good quality firms are pulled down with the rest, there’s a chance of finding better value than we could have found just a few days ago.
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Here are two compelling reasons to focus on technology firm ARM Holdings (LSE: ARM) and testing and inspection specialist Intertek Group (LSE: ITRK).
1. Market position
ARM provides the architecture for the digital world. The firm is the world’s leading semiconductor intellectual property (IP) supplier and, as such, its offering is at the heart of the development of digital electronic products worldwide.
The company licenses its technology to leading semiconductor manufacturers who incorporate ARM’s chip designs alongside their own technology to create smart, energy‑efficient chips suitable for modern electronic devices such as smart phones.
It’s a fabulous business, and ARM’s healthy-looking operating margin, running above 50%, underlines the resilience of the firm’s economic niche within today’s world of digital everything.
Escalating consumer demand for inter-device connectivity is the latest trend driving growth, and margins have been improving despite their existing strength. The firm is moving fast to capitalise on a vision that predicts a so-called Internet Of Things, and foresight like that keeps the firm in the vanguard of firm’s moving with the latest trends of our time.
Meanwhile, Intertek’s leading position in what it calls ‘quality solutions’ sees it providing industries worldwide with auditing, inspection, testing, training, advisory, quality assurance and certification services. The firm reckons it adds value for its customers by improving the quality and safety of their products, assets and processes.
With a healthy operating margin running in excess of 15%, it’s clear that Intertek has engineered a niche that makes it a vital cog within its operating industries.
2. Robust cash flow
Such rock-solid market positioning leads to healthy and rising cash flow for both firms.
ARM’s record on cash generation looks like this:
| Year to December | 2010 | 2011 | 2012 | 2013 | 2014 |
|---|---|---|---|---|---|
| Net cash from operations (£m) | 176 | 194 | 261 | 315 | 342 |
And here’s Intertek’s.
| Year to December | 2010 | 2011 | 2012 | 2013 | 2014 |
|---|---|---|---|---|---|
| Net cash from operations (£m) | 194 | 213 | 233 | 269 | 292 |
The mark of a quality company boils down to its ability to generate ever-increasing flows of cash from its operations, something that ARM Holdings and Intertek Group do very well.
What next?
We shouldn’t allow stock market corrections and macro-economic wobbles to distract us from solid cash-generating businesses such as ARM Holdings and Intertek Group.
