My ISA Watch List: Whitbread plc, GlaxoSmithKline plc And Dignity Plc

From 6 April 2015, we can load up our ISAs with shares to the value of the new £15,240 allowance.

What should we buy?

In the spirit of Warren Buffett and other great and successful investors, I reckon a quality-led approach to investing can deliver better long-term total returns than a price-led strategy.

Lead by price and we might end up dealing in some ropey old firms that come with hidden dangers. So, it may be better to sift the market for quality companies with great economics and attractive prospects. Once we’ve identified such quality-leaders, we can watch them and wait for a sensible entry point — perhaps during a period of general market weakness, or when some temporary issue knocks the firm’s share price.

With the aim of building a Champions League watch list, lets see why Whitbread (LSE: WTB), GlaxoSmithKline (LSE: GSK) and Dignity (LSE: DTY) make the grade.

Fast-growing coffee and hospitality

Whitbread’s business in hospitality sees it owning the well-known Premier Inn, Costa Coffee, Beefeater, Brewers Fayre, Table Table and Taybarns brands. The year is going well, with the firm saying it continued strong trading momentum in the final quarter, with total sales growth of 14.3% and like-for-like sales growth of 5.8%.  

The stars in the firm’s portfolio are Premier Inn and Costa, both of which continue their rapid growth. As well as winning new market share, the directors reckon Premier Inn also gained from a recovery in the UK regional hotel market. As we’ve become used to hearing from Whitbread in recent years, the firm’s strong performance leads to expectations of full-year results towards the top end of current expectations. We’ll find out for sure when they are released around the 28 April.

As long as I can remember, Whitbread shares looked a bit pricey by conventional earnings valuation methods such as the P/E ratio. However, avoiding the shares has been a mistake, because they are up around 650% since 2009. Growth rarely comes cheap, but when we see investment performance like this it then begs the question of high valuation, “So what?”

A pharmaceutical defensive

It’s been well reported how big pharmaceutical firms such as GlaxoSmithKline lost business and profit margins thanks to generic competitors moving in on previous big-selling drugs timed-out on patent exclusivity. However, according to the directors, the firm’s R&D pipeline will fuel growth with a sustained flow of new products over the next five to ten years.

The fundamentals of the pharmaceutical industry remain attractive, with ever-aging populations driving increasing demand for drugs and formulations, which have strong repeat-purchase credentials. Within the sector, GlaxoSmithKline looks like a potential steady-eddy investment that could delight on the upside if emerging markets really gain traction over the coming years.

Funeral services

In Dignity, we find a company set on consolidating the UK funeral market with a vibrant acquisition programme. The firm gives us a chance to invest in a market with rock-solid demand and a steady growth curve.

Because demand is so consistent, the firm geared up operations to fund all its acquisitions and now carries a fair amount of debt. However, strong cash flow seems assured, so this is one growth story that seems to carry little penalty for arriving late.

The watch list so far

Including the firms identified in previous articles the ISA watch list looks like this: