Spotting great companies

Anyone investing in individual stocks should concentrate their dollars on the best companies they can find. Here are key attributes to look for:

• Consistent growth and strong profit margins. Revenue and earnings increasing steadily is a sign of good management. Compare gross, operating and net profit margins with those of competitors to see who’s kept the most from each dollar of sales. Look for upward trends, too.

• Meaningful products or services. Favor companies selling things people really need or want. People won’t easily give up their prescription drugs or electricity, for example. Companies such as Netflix and Apple offer items consumers crave. Also appealing are items that people buy repeatedly, such as gas, shampoo, sandwiches, socks and books, instead of items bought only sporadically, such as cars, ovens and pianos.

• Powerful brands. Widely known and well-respected brands can permit a company to charge higher prices and more easily introduce new products and services. Some great brands are CocaCola, Disney, Amazon, Visa, Starbucks, GE, McDonald’s and Google (Alphabet).

• Sustainable competitive advantages over peers. These can include dominant brands, economies of scale and bargaining power. Wal-Mart, for example, is so big that it can make demands of suppliers — and it can prosper despite low profit margins because of high volume.

• Growth potential. A promising future is critical. Is the company expanding abroad? Is it launching new products or services that consumers are embracing? Is it spending significantly on research and development?

Finally, consider how well you know the company and industry and how much you’d enjoy keeping up with its developments. If reading about a certain company puts you to sleep, it’s not your best portfolio candidate. Once you find companies in which to invest, be sure only to do so when they’re attractively priced.

(The Motley Fool owns stock in and has recommended some of these companies.)