'Strong leaders': Buy 2 ASX 200 stocks with quality earnings

Solaris' Michael Bell reckons this pair of businesses have trustworthy 'quality' earnings that can supercharge your portfolio.

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In times of economic uncertainty, it's not far-fetched to think investors need to buy S&P/ASX 200 Index (ASX: XJO) stocks that are more than just speculation.

They need to hunt the market with well-defined criteria that maximise the chances of a positive return in the coming years.

Solaris Investment Management reckons it has two winners that are in a great position to drive up their valuation over the long term.

Here's what chief investment officer Michael Bell said at this week's Pinnacle Summit in Sydney:

'Strong pricing power'

For Bell, medical plant maker Cochlear Limited (ASX: COH) and technical design software provider Altium Limited (ASX: ALU) are capable of producing what his team calls "quality earnings" over many years.

"Both are growth companies," he said.

"Both companies are strong leaders in their industry with strong pricing power."

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The Solaris team places tremendous importance on positive cash flow, so that reported earnings are not muddied by interest liabilities, capital expenditure, depreciation and general "accounting trickery".

Bell himself is fond of citing the Warren Buffet quote "People who use EBITDA are either trying to con you or they're conning themselves… interest and taxes are real costs."

Not dressing up their earnings

Altium and Cochlear have much in common despite playing in very different industries.

"They both have good balance sheets and good management. They both have a history of strong revenue growth," said Bell.

"And we expect that to continue going forward."

He credits both companies with having strong "earnings quality", which is avoiding the use of accounting loopholes to make the EBITDA look better than it actually is.

"They expense capex. That is really important to see that. That gives us confidence to invest in these companies."

Other investors are starting to wake up to Altium, it seems, with the share price surging more than 20% since reporting season. Same for Cochlear, with the stock trading more than 14% higher than before its recent results.

Motley Fool contributor Tony Yoo has positions in Cochlear. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Altium and Cochlear. The Motley Fool Australia has recommended Cochlear. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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