The top picks from the 100 best stocks in the world

Using our financial data, we analyzed 100 stocks backed by the world’s top fund managers to find out what they thought makes a top stock.

These are the 100 stocks that the world’s top 5% of fund managers have the highest conviction out of the 7,000 stocks they own together.

We believe our numbers provide some fascinating insights into the types of investments that drive the success of elite fund managers. Broadly speaking, they are stocks that, while a bit expensive, offer exposure to extraordinary companies that excite the world’s best investors.

These are companies that have high operational quality, strong growth prospects and solid share price momentum. One could think of such stocks as value stocks in the holistic sense advocated by Warren Buffett.

You get what you pay for

As for price, the average valuation of the top 100 stocks is high, but not too high.

Based on expected earnings over the next 12 months, the average price/earnings ratio is 21 times. By comparison, the P/E for the MSCI World Index is 14 times. The top 100 mid-range stock from which we derive our median P/E is the French chemicals company Air Liquide.

The median of its expected free cash flow yield—a valuation metric considered by many to be less worrisome than the P/E—is 4.2%. Again, this is quite loud, but by no means painful. The stock that represents this average among the top 100 is the French call center and chatbot specialist Teleperformance SE.

Go for growth

Top 100 stocks have impressive growth expectations. Importantly, expectations have improved rather than worsened recently as the prospect of a recession looms large. One caveat is that analysts are notoriously slow to price in downturns – and market forecasts appear to be no exception.

In terms of historical growth, our average top 100 company has had impressive results in terms of sales and even better results in terms of earnings thanks to increasing profitability.

The five-year CAGR for sales is 14% – British discounter B&M European Value Retail represents the median on this score – while the five-year CAGR for earnings per share (EPS) is a tempting 18%. The American electronics group II-IV lies roughly in the middle.

The EPS growth forecasts are also impressive. For our top 100 elite stocks, the median growth forecast for the next 12 months is 14% – with US healthcare provider United Health providing the median forecast – and also 14% for the trailing 12-month period – the median is shared by United Health and Teleperformance.

And there is good momentum behind forecasts from brokers and banks. The average increase in consensus forecasts for our top 100 over the past three months was 3.9% – the median in this area is China’s leading luxury spirits brand Kweichow Moutai. Over the past 12 months, it’s up 23% – a shared middle ground between the US payments goliath MasterCard and once again the average excellent teleperformance.

A question of quality

Growth is only valuable to shareholders if a company’s operations are of sufficient quality. EPS growth destroys rather than creates shareholder value when the return on capital invested in growth is less than the cost of capital invested.

For most of the top 100 stocks, however, there is nothing to worry about. Classic enterprise quality measures look impressive.

The average operating margin for the 100 companies is an impressive 17.2%. The US-listed industrial gas and hydrogen specialist linden tree is in the middle of the field for this key figure, while the return on invested capital is a robust 13.8% – that would be Teleperformance again.

For the top 100 companies, value creation from investments in intangible assets such as intellectual property, software and brands appears to outweigh tangible assets such as real estate and machinery.

Median spending on research and development (R&D) as a percentage of revenue has been 5.9% over the past five years. The midtable company here is the Japanese electronics giant Sony. Median five-year capital expenditure (capex) as a percentage of sales is lower at 5.1% – the Japanese IT consulting and industrial machinery company Hitachi. One caveat is that we have more data on fixed investment than on R&D expenditure from our 100 companies.

Since financial health is another important element in assessing company quality, we can be pleased to see that the balance sheets and cash flows of the top 100 stocks look robust on average.

For companies with higher leverage ratios, the average net debt of 1.4 times Ebitda looks very manageable – Swiss Sustainable Building Materials Group Sika is in the middle here. Median conversion based on pre-tax operating cash flow to Ebitda is a whopping 96% – the US medical technology company Danaher.

Facing forward

There is no point in owning shares in a large company if no one else shares your arguments and the share price plummets. While many of the top 100 stocks are far from household names, the dynamics of share prices show that they still have enough fans.

At this point we switch from looking at the “median” average to the mean, which is a more meaningful way of looking at price action.

The average month-on-month share price performance of the top 100 companies is solid, slightly ahead of the MSCI World Index. That’s impressive over 3 months and a real banger over 1 year at 4.0% compared to -10.5% of the index.

Overall, from a variety of financial metrics, the average top 100 stock looks like an investment opportunity that stands out significantly from the average.

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