BOOK EXTRACT

5 TOP STOCK PICKS

Top Stocks first appeared in 1995 with the simple aim of helping the fast-growing number of independent investors find the best public companies in Australia using some strict – but easily understood – criteria. The book is now in its 24th edition, and these criteria have remained remarkably consistent.

Every company in the book must be included in the S&P/ASX All Ordinaries Index, which comprises Australia’s 500 largest stocks (out of around 2200). The reason for excluding smaller companies is that there is often little investor information available on them, and some are very thinly traded.

It is also necessary that each company be publicly listed for at least five years, and that it made a profit and paid a dividend in each of the previous five years.

All companies are required to post a return-on-equity ratio of at least 10% in their latest financial year. And no company should have a debt-to-equity ratio of more than 70%, also in the latest financial year.

There are a few exclusions. Foreign companies listed on the ASX are not included, nor are listed managed investments.

These simple benchmarks each year generate between about 90 and 105 companies for the book.

It should be noted that share price performance is not relevant. The purpose is to select companies with good profits, regular dividends and a strong balance sheet. Nevertheless, of the 91 companies in Top Stocks 2018, 76 have provided investor returns – share price appreciation plus dividends – of an average of at least 10% over five years. In fact, 40 of these 76 companies have given an annual average return of at least 20%.

And eight of them – Altium, Aristocrat Leisure, Blue Sky Alternative Investments, Capilano Honey, Corporate Travel Management, Magellan Financial Group, MNF Group and Pro Medicus – have provided an annual average return over five years of more than 50%.

Despite the name, Top Stocks is essentially a book about companies. Indeed, one of the rationales of the book has always been to highlight the fact that Australia boasts many excellent companies that enjoy high profits – and growing profits – regardless of the markets.

That is why I do not generally try to predict the market. I look instead at individual companies.

Nevertheless, my expectation is that in 2018 the local stockmarket can expect modest gains at best. And a sharp housing slowdown or an American or Chinese financial shock are both possibilities, and could be the spark for a market decline. That is why, once again, I urge investors to look at individual companies with good prospects. Few stocks can escape unscathed from a significant crash but the good companies will be among the first to recover. And whether markets are up or down, they should, over the long term, handily outperform.

Here are five companies from Top Stocks 2018 whose prospects appear promising.