I’m always looking to make investments in my Stocks and Shares ISA. Over the long term, I believe the best returns come from owning shares in quality companies.
Equally though, I think it’s important to invest only when the price is right. And right now there are a few stocks I’d like to buy… but only if the opportunity presents itself.
Quality shares
When I invest, I look to buy stocks that will provide returns for a long time. That means the most important thing to find is a business that will prove durable.
This usually means a firm that dominates its industry or has something that differentiates it from its competitors. This allows the company to generate strong shareholder returns.
The trouble is, shares in these businesses are typically expensive. And even the best shares can be bad investments if the price is too high.
Despite this, the stock market has a way of doing unexpected things. So it’s worth being prepared for opportunities that might present themselves.
Diploma
I sold my stake in FTSE 100 distribution company Diploma (LSE:DPLM) just over a year ago at a price of £28.18. The stock is now trading at £41.52.
Diploma isn’t just a distributor. It differentiates itself by offering a bespoke service, strong technical knowledge, and a scale that allows it to get products to customers quickly.
This makes it difficult to disrupt, but I decided the stock was too expensive and sold it. Since then, the company has grown strongly both organically and through acquisitions.
I still find it hard to consider buying it today at a price-to-earnings (P/E) ratio of 48. But if that comes down in July, I’d love to buy it for my ISA again.
CostCo
CostCo Wholesale (NASDAQ:COST) is one I’d love to own in my ISA. It has the lowest prices in the industry and a business model that helps it maintain this position.
Unlike other retailers, CostCo charges a membership fee to shop in its outlets. Having this additional revenue stream allows it to charge less for products than its competitors.
This attracts more customers, which results in more membership fees and the cycle repeats. It’s a terrific strategy that has taken the stock from $268 to $862 over the last five years.
Given its size, I’ve become a little wary of CostCo’s growth prospects. I therefore wouldn’t buy it at a P/E ratio of 53, but I’d jump at the chance to buy shares at a better price.
Investing: the basics
Fundamentally, for shares in a company to be a good investment, the business has to generate enough cash to justify the current price. That’s the basic idea behind investing.
At the moment, Diploma has a market cap of £5.5bn and generates £187m in free cash – a 3.5% return. CostCo earns $7.4bn with a market cap of $381bn, which is a 1.9% return.
A lot of growth is therefore already priced into both stocks, so I’m watching them from the sidelines for now. But if a better opportunity presents itself, I’ll be ready to make a move.
This post was originally published on Motley Fool
