Companies In My Universe

Companies In My Universe - Main

Overview

There are over 2,000 companies listed on the London Stock Exchange. At the time of writing Stockopedia had 2,125 UK stocks on it’s database.

I used to consider all of these stocks and invest in any of them, now I do not. It’s just way too many for me to cover, keep track of and maintain some kind of focus on.

I now use quite specific (but simple) criteria to define what I call “Companies In My Universe”, a much smaller and focused list of stocks.

Market Capitalisation

First of all, I classify companies into 3 quite broad categories based on their Market Capitalisation (Market Cap), basically how much they are worth.  Here’s those categories…

  • Immature (teenager) companies – These are mature enough to be listed on the London Stock Exchange but not mature enough for me to consider investing. I categorise any company with a Market Cap below £30m as immature. I liken them to teenagers, they can be quite unpredictable – It’s not particularly easy to know what they will do next or how they will develop.
  • Maturing (adult) companies – There are the companies I am interested in. I liken them to adults at this stage. They’re usually more predictable and it’s usually easier to make a judgement on how they might develop. Hopefully they will develop into “Mature companies”. I categorise any company with a Market Cap between £50m and £300m to be maturing. However, to give myself some leeway and firm cut off points I extend this to £30m and £500m.
  • Mature (pensioner) companies – There are companies that should have little surprises. They’re typically proven, set in their ways and have less likelihood of the growth a “Maturing company” can potentially offer. I categorise any company with a Market Cap greater than £500m to be mature.

I am interested in investing in “Maturing (adult) companies”. That’s those with a Market Cap between £30m and £500m. These companies are usually a little more predictable and have plenty of room for potential growth. They can be the next “Mature company”.

By applying this criteria the initial list of stocks is more than halved, from 2,125 stocks to 812.

Industry Groups

Next, I eliminate stocks in Industry Groups in which I don’t typically invest in. Some of these groups I just don’t understand, some I consider too volatile and some are just not appropriate for my style of fundamental analysis. Some groups meet one, two or all three of these criteria.

I eliminate stocks in the following groups…

  • Coal
  • Oil & Gas
  • Oil & Gas Related Equipment and Services
  • Renewable Energy
  • Uranium
  • Metals & Mining
  • Industrial Conglomerates
  • Holding Companies
  • Insurance
  • Real Estate Operations
  • Residential & Commercial REITs
  • Collective Investments

By applying this criteria the list of stocks is again significantly reduced, from 812 stocks to 481.

Eliminating stocks in these groups is a personal preference. Anyone can choose to eliminate stocks in more or less groups than this. For me, for example, it would be meaningless for anyone with extensive knowledge of the Renewable Energy sector to eliminate stocks in that group.

Anyway, eliminating stocks in these groups works for me. I reckon most would benefit from some form of Industry Group elimination, certainly worth consideration at least!

Profitability

It is very rare that I ever invest is a company that is not making a profit. This of course means that sometimes I miss getting in early on a potential winner. On the other hand it also means I don’t invest in companies burning through cash that will perhaps never make a profit. My view on this is that if any company is going to be truly great it will first make a profit and, hopefully grow those profits. I much prefer to wait and see that profit come in and miss some of a move than I am to invest “in hope” that it will come in. This applies to new companies that have yet to make any profit at all as well as companies that once made a profit and then make a loss. I almost always prefer to see an actual return to profit before investing.

Anyway, by eliminating companies not making a profit the list is reduced by a surprising amount, over 30%.

I am left with just 325 stocks.

Summary

By applying specific (but simple) criteria I now have a list of stocks that make up my “Companies In My Universe” list.

From a potential list of 2,125 stocks I now take an interest in just over 15% of them, 325 stocks.

This is a  much more manageable list of stocks that I can easily cover, keep track of and maintain some kind of focus on.

Notes

This criteria works for me and gives me a very manageable “universe” of stocks.

Some may be interested in companies in different Industry Groups to me. Some may prefer larger companies, some may prefer smaller companies. Some may wish to take the additional risk of investing in non-profitable companies, perhaps not! Some may prefer companies paying a dividend (I don’t really care). The options are endless.

The points here are…

It’s quite easy to get to the stage of having a more manageable universe of stocks to keep an eye on (as potential investments). It’s also much easier to work with a manageable universe of stocks.

Let some simple criteria define your universe, perhaps!

Hope it helps, all comments welcome!