This is the third 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 post we told you about 11 companies that fit the profile of Forwards. They were high growth companies with high return on capital, companies with a long runaway ahead of them.
In this post we talk about companies that can play the role of Mid-fielders in your portfolio.
Who are Mid-fielders?
Mid-Fielders are the most versatile players. They pass the ball from defenders to forwards and also take possession of ball from opponents. They have pace and more stamina than other players. Not to forget, they are the ones who run the most and cover a large portion of the field. At time they play the role of defenders, and other times they also score goals. However, for most of the time they occupy the mid-field quickly moving the ball from one end to the other.
Which company-stocks qualify as Mid-fielders?
In a portfolio, the established companies growing at above average rates are ones that have strong stamina and pace, characteristics similar to that of Mid-fielders. High growth is the primary criteria while choosing mid-fielders in the portfolio, but their ability to keep the pace of performance going across the cycles is. This means they are able to deliver good results even during the market downturns. We choose companies as mid-fielder companies when they exhibit the following qualities:
- High return on capital employed and profitability across the market cycles.
- Companies having reasonable growth rates along with ability and opportunity to redeploy the profits back into the business.
- Businesses having strong moats, ensuring the sustainability of good metrics over the long run.
You will be surprised to see that few stocks in Mid-Fielders have characteristics of ‘Forwards’ and some look like ‘Defenders’ (coming on 6th July). For example, few Mid-Fielders like Page Industries and Bajaj Finance have had high growth rates in earnings and sales in the past and there’s no denying the fact that these have been the forwards of yesterdays and may have similar high growth rates in the future too. But, the reason for keeping these as Mid-Fielders is the fact that they have built stronger balance sheet, have sustainable moats or at least strong competitive advantages to withstand tougher economic and competitive challenges. These are more important reasons to have them in your portfolio than their high growth rates.
Similarly, some Mid-Fielders may have slower growth rates similar to Defenders raising a question of why stage them as Mid-Fielders. For some it may be due to their large current size. Mid-fielder companies may have modest to low growth rates, but they have the opportunity and ability to reinvest in the business and still maintain high ROCE and profitability because of their inherent strengths. Therefore they grow profitably and consistently making them Mid-fielders.