How to Find Companies that Dominate the Market

Standing still will get you killed.

This is especially true in the tech industry. If you’re not doing something different or adapting to change, then you’ll fade into history.

I mean, look at Google, Amazon and Netflix.

These are companies that don’t stand still.

They’re constantly looking for more projects and different ways to make themselves better.

Of course, there are occasions where you’ll find companies that don’t need to innovate. They also don’t need to adapt to change.

They dominate a market will little or no effort thanks to some type of advantage.

On that point, if you do find such a company write in at cs@portphillippublishing.com.au. I’d love to hear what you’ve found.

But for most companies, the adage of adapt or die applies.

Just look at what’s happening in China right now.

Alibaba Holding Group Ltd [NYSE:BABA], the nation’s dominate ecommerce platform, is losing business to young up-start Pinduoduo [NASDAQ:PDD].

In just four years, Pinduoduo has grown to house over 300 million users.

In local terms, it’s as if some young ecommerce site started out amazon-ing Amazon.

That’s why, if you’re going to invest a majority of your wealth, you better buy the businesses resistant to change.

But where can you find such businesses?

One possible arena is pharmaceuticals.

Pharmaceutical powerhouses leading the pack

CSL Ltd [ASX:CSL] is a well-known Aussie brand.

They’re a global leader in immunoglobulins (antibodies) for a whole bunch of disorders and diseases.

CSL generate billions from their products. And about 20% of sales turn into profits. Take a look at the following figures:

MoneyMorning 15-08-18

Source: Bloomberg
[Click to open new window]

CSL’s return on equity (ROE) is saying the business generates around 46.7 cents on every dollar of shareholders money.

Return on invested capital (ROIC) just adds debt to the mix. And even with debt, CSL generate about 22 cents on each dollar invested.

It would be similar to buying a house for $800,000 and collecting $160,000 in rent each year (a 20% return).

Whenever returns like this pop up, there are quickly lots of people chasing that return.

So why haven’t competitors come in to spoil CSL’s amazing returns?

To explain you need to know a little about the pharmaceutical industry.

Companies like CSL spend millions, sometimes billions, to develop and test drugs. And because they spend such enormous amounts getting these drugs to market, society believe they should be entitled to any future profits.

This is why we have patents. These patents give holders, and usually no one else, the right to produce something.

So while many competitors would like to share in CSL’s profits, they cannot by law.

So as long as CSL continues to develop highly profitable drugs, investors will be more than happy to buy the stock.

Just this year, CSL’s stock passed the $200 mark, which represents an expected 2018 price-to-earnings (PE) ratio of 38.

Of course, the whole industry isn’t full of CSLs. There are plenty more speculative bets as well.

Taking a bet on small biotech stocks

An example of a more speculative bet in the pharma industry is small biotech stocks.

These stocks are usually smaller than the global pharma’s. Some, maybe even most, might not be generating a profit yet.

The goal for these companies is to develop a drug which sees earnings skyrocket.

The sad truth is that a lot won’t achieve their goal. Only a few biotechs really hit it big.  And in China right now, it’s now a race to see which biotech company can develop a new kind of cancer treatment.

South China Morning Post picks up the story:

China’s huge cancer-treatment market is a potential gold mine for drug developers.

But fierce competition to get a new group of medicines approved could see prices fall rapidly and the market fragment into tiers of products with varying efficacy and safety, analysts say.

Anti-PD-1 drugs and T-cell engineering, types of immuno-therapy treatments that use the body’s own immune system to fight tumours, have seen a surge in research and development investment globally.

…BeiGene, a Beijing-based drug maker that went public in Hong Kong this month, is targeting approval from the China Drug Administration (CDA) to bring to market its PD-1 antibody for treating classical Hodgkin’s lymphoma before the end of the year.

Rival firms that have also applied to the regulator to market their own PD-1 drugs include Shanghai-listed Jiangsu Hengrui Medicine, and Shanghai Junshi Biosciences and Jiangsu-based Innovent Biologics, both of which have submitted initial public offering applications to Hong Kong’s bourse.

Junshi’s drug is for skin cancer while those of Innovent and Hengrui are for classical Hodgkin’s lymphoma.

But unlike companies with CSL’s characteristics, you wouldn’t bet the farm on biotech stocks. The simple reason being that their future is extremely uncertain.

They might run out of cash. Regulators might tell them to conduct further studies, pushing back a commercial launch. Competitors might be working on something that works even better.

But because of this uncertainty, a lot of these biotechs house huge potential.

$500 million in sales is worth a lot more to a $100 million company than it is to CSL.

Again, you shouldn’t bet the farm on these stocks. But that doesn’t mean you can’t take a calculated bet on these opportunities either.

The beauty is you don’t have to put down massive amounts on these types of stocks. It’s not uncommon for a biotech stock to race up 10 times or more, turning $5,000 into $50,000.

It’s not always easy finding such opportunities.

But I believe I have.

It’s an opportunity that could turn $5,000 into 120,000!

You can find out all the details here.

Your friend,

Harje Ronngard,
Editor, Money Morning

PS: If you want to lay down a little money on the hottest corner of the ASX right now…but you don’t know your way around the small-cap sector…this report is for you. Get access now (free).


Harje Ronngard is the lead Editor at Money Morning. He’s also the Editor of Wealth Eruption and co-Editor of the Third Wave Portfolio.

The aim of both Wealth Eruption and the Third Wave Portfolio is to find misunderstood opportunities. These are the type of investments that multiply small amounts of money five- to 10-times in size.

Harje has an academic background in investments and valuation. He’s had experience across a range of asset classes, from futures to equities.

For any investment, Harje believes you only need to ask two questions. What is it worth? And how much does it cost? These two questions alone open up a world of opportunities, which Harje shares with Money Morning readers five days a week.


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