Fool's School Great Companies

If you're going to invest in some companies, you will most likely do best with the best. Here are some marks of great companies:

Powerful brands. Think of well-known brand names in America or, better yet, the world. For example: Coca-Cola, Pepsi, GE, Nokia, McDonald's and Ford fit the bill. If most people don't yet know a brand name, the company still has a lot of work to do.

Significant products or services. Look for firms selling things people really need or really want. Pharmaceutical companies, for example, make products that people will buy whether they are flush with funds or strapped for cash. Firms such as Domino's Pizza and Anheuser-Busch offer consumers things they crave. Also appealing are repeat-purchase products - things people buy over and over again - such as express mail delivery, tacos, socks and soap, instead of items bought only sporadically, such as cars or washing machines.

Strong competitive position. Ideally, a company will have advantages over its peers. These can include brand value, economies of scale (if it is making so much that its per-item costs are relatively low), and bargaining power. (Wal-Mart, for example, is so big that it can boss its suppliers around.)

Consistent, reliable earnings and sales growth, and robust profit margins. Look for steadily increasing sales and earnings, reflecting capable management. Compare gross, operating and net profit margins with those of competitors to see who is wringing the most value out of each dollar of sales.

Lots of potential. A stellar past is not enough. Is the company expanding abroad? Is it coming out with promising new products or services? Are its offerings taking consumers by storm? Is it spending significantly on research and development?

Finally, consider how well you know the company and industry and how much you would enjoy keeping up with its developments. A firm might have enormous potential, but if reading about it puts you to sleep, it might not be the best addition to your portfolio.