This is the fifth post in our series: What football can teach you on Stock Investing? There are four player-positions in football-Forwards, Mid-fielders, Defenders and Goalkeepers. We can draw direct analogies from how they perform different roles. Companies and their stocks have different characteristics and perform differently under different conditions. In our last three posts we told you about companies that fit the profile of Forwards, Midfielders and Defenders.
In this post we talk about companies that can play the role of Goalkeepers in your portfolio.
Who are Goalkeepers?
Goalkeepers protect the goal post and prevent an opponent from scoring a goal. On most occasions he is the last and the only player to prevent imminent loss. To protect a portfolio against loss, we need to park money in assets which don’t carry risk of value erosion over the long term.
Mature businesses which have strong legacy brands or assets, and hold the fort for your portfolio resemble Goalkeepers. These stocks unlike the other categories may not register high growth but generate decent and stable returns on capital. And, they are unaffected by the economic cycles and headwinds at any given time leading to low cyclicality as compared to Forwards and Mid Fielders.
Goalkeepers may not be able to grow at high rates or have the opportunity to deploy capital back into the business since they are usually mature business in well penetrated categories. So, these companies tend to pay most of their profits as dividends to investors. This adds stability and protection to the portfolio and prevent it from going south in the uncertain times.
We look for the following in companies before selecting them as goal keepers:
- Companies enjoying a dominant position in the industry.
- Companies in industries that are in matured phase with stable cash flows and consistent dividend pay-outs.
- Utility companies having regulated return on equity, which provides visibility and stability in profits.
- Companies that have done upfront capital expenditures in the past and pay out all the cash flows e.g. sectors like ‘Telecom Towers’, ‘Road Tolls’, ‘Ports’ etc.