Finding great companies to own is often a process of attrition.
As investor Peter Lynch put it:
"Searching for companies is like looking for grubs under rocks: if you turn over 10 rocks you'll likely find one grub; if you turn over 20 rocks you'll find two." — Peter Lynch
Companies with weak competitve advantages, no pricing power, or poor management records can be crossed off the list right away.
For example, here are three companies I would dump today:
Coca-Cola Amatil Ltd (ASX: CCL)
I want to like Coca-Cola Amatil, really I do. But I don't think the brands the company produces have kept up with changing consumer tastes resulting in an influx of competition from small, niche brands.
Losing the contract to supply Domino's Pizza Enterprises Ltd (ASX: DMP) is significant and could impact volumes by about 3% according to Deutsche Bank. It also shows the increasing price pressure the company is coming under.
Coca-Cola Amatil has long had a halo with investors because of its association with the iconic U.S. company adored by Warren Buffett who has vowed to never sell. I don't think that is a valid investment thesis for Coca-Cola Amatil and wouldn't own it today.
QBE Insurance Group Ltd (ASX: QBE)
To me there is a reason QBE Insurance consistently underperforms; it operates in a competitive industry without an attractive competitive advantage.
We can see this in the company's poor recent growth and weak margins, which puts profitability at risk if QBE gets hit by above average insurance claims.
I much prefer the operating metrics of Insurance Australia Group Ltd (ASX: IAG) which operates at a superior combined ratio (the sum of incurred losses and expenses, divided by earned premium revenue) and returns on equity.
Fletcher Building Limited (Australia) (ASX: FBU)
Fletcher Building has been a debacle this year, writing down hundreds of millions of dollars and losing the company's CEO.
Problems with the company's 'Building + Interiors' division will impact multiple major projects and suggests some kind of systemic failure. I would not expect this from a well-managed company.
Failure to capitalise on opportunities, combined with only average historical shareholder returns means I would dump Fletcher Building.
