As I discussed in a previous article here, investors who focus on purchasing companies with above average returns on equity (ROE) are well placed to purchase companies of above-average quality.
It is also beneficial to buy businesses operating in industries experiencing a tailwind rather than a headwind, which makes the following four companies that operate across the technology and telecommunications industries even more desirable.
1. Iress (ASX: IRE) provides critical software systems to financial industry participants. The company's equity systems and wealth management systems command major market share within their respective markets of Australia, New Zealand, Canada and South Africa; while Iress' presence in Asia and the UK is also growing.
According to Morningstar's data, ROE for financial year 2012 was 31% (Iress has a December year-end), although ROE has been declining over the past decade from a high of 48%, Iress is still outstandingly profitable. This quality has been reflected in the company's total shareholder return, which has averaged just over 19% per annum for the past decade.
2. REA Group (ASX: REA) is better known by its flagship website realestate.com.au, however the company is diversifying and now has websites across Europe and Hong Kong as well. With a ROE of nearly 35%, forecasts for growth of over 20% in earnings for the next two years, and its dominant market position, the high quality nature of this stock is hard to argue with.
3. TPG Telecom (ASX: TPM) is one of a handful of 'second-tier' telecommunication stocks which have grown rapidly over the past few years. TPG operates across the full suite of telco services including phone, broadband and data services to corporate, retail and wholesale customers. The $3.4 billion company saw its ROE increase to nearly 21% for the year ending June 2013, up from 15.4% the year before.
4. iiNet (ASX: IIN) also falls into the 'second tier' telco category with its offer of broadband internet, mobile and associated services. The company grew its ROE of 18.8% for the 2013 financial year, which according to Morningstar was its highest level in the past decade.
Foolish takeaway
Perhaps the greatest problem with companies that produce above-average margins and returns is that other investors like them so much that the share prices often don't look appealing to Foolish buyers when compared to the company's intrinsic value. A quick check of the 52-week trading ranges of the above stocks however shows that each of these firms could have been purchased at significantly lower prices in just the last year – which is why, for long-term investors, patience is a virtue!
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Motley Fool contributor Tim McArthur owns shares in Iress.
