The FTSE 100 index is home to several high-quality shares. Today, I’m looking at two potential options I could pick for my Stocks and Shares ISA. I’m particularly looking at companies that can demonstrate both quality and growth.
I’d describe a quality company as one that consistently provides a high return on capital employed (ROCE). This is a measure of how effectively a company turns its capital into profits. Popular investor Terry Smith frequently highlights this and says “it is the most important financial measure of what a company is delivering”.
I also want my quality shares to have a competitive advantage. This attribute is what renowned investor Warren Buffett has frequently described as an ‘economic moat’.
Making the right moves
One FTSE 100 company that stands out as a suitable candidate according to my criteria is property portal Rightmove (LSE: RMV). It has a return on capital employed that’s off the charts. At 186%, it’s more than double the figure of the next company on the list. I like that it also benefits from a chunky profit margin of over 70%.
So has it got a competitive advantage? I’d say so. Rightmove describes itself as the place home-hunters turn to first. It boasts a market share of time on portals of 90%. That’s almost a monopoly. Rivals have tried to get close, but with such a strong market position, Rightmove has proved hard to beat. I also like that it benefits from consistently rising earnings.
A word of warning, however. An economic slump or recession could reduce housing activity. Fewer people moving home translates to fewer listings. Also, a rise in interest rates could be around the corner in a battle to contain inflation. This could cause housing transactions to slow too. Yet on balance, as a long-term investment I reckon Rightmove is a resilient business worthy of my portfolio.
Top of the shops
The second FTSE 100 share I’d consider buying is discount retailer B&M European Value Retail (LSE: BME) — more commonly known as B&M. This is a great business, in my opinion. It offers a return on capital employed of 23%. Its sales and profits are growing, and it even has a dividend yield of 3%. I also like that its entrepreneurial CEO owns over 10% of the company, highlighting ample skin-in-the-game.
Leading up to Christmas is the busiest time of the year for B&M. I reckon with Christmas plans disrupted last year, many households could be preparing for some extra celebrations this year. This could bode well for the general merchandise retailer.
The company says it’s well-positioned for the busy quarter, but it’s important to note that customer demand remains uncertain. Pandemic measures could also change between now and Christmas. Also, household savings might be getting squeezed with rising costs and energy bills.
Overall, B&M demonstrates both quality and growth though, and I’d consider it for my portfolio.
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Harshil Patel has no position in any of the shares mentioned. The Motley Fool UK has recommended B&M European Value and Rightmove. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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