What Is A 'Best Of Breed' Stock?

Well bred! Can this expression be said of your stock? If so, it could qualify as a "best of breed." Just as the "best of breed" title is endowed on the best quality dog of each breed competing in a dog show, stocks are also called as "best of breed" if they meet certain criteria.

‘Best Of Breed' Meaning

A "best of breed" stock is the most optimal investment choice for a specific sector or industry due to its high quality compared to its competition. This phrase is a slang version of the expression best in class."

Why Scout Out A Best In Breed?

This moniker could help an investor zero in on the best investment avenue belonging to each sector/industry, given that a typical investor has to put to good use the limited investment dollar at his disposal.

Identification of the best in breed stocks is also important because these are the stocks that can weather a market downturn or correction. These companies having dominant market position and solid balance sheet are better equipped to emerge out of an economic downturn or industry-wide recession unscathed or with very limited damage relative to their peers.

Criteria

Some fundamental metrics and other qualitative factors could form part of the assessment criteria to brand a stock as the "best in breed." These criteria apparently will have to be compared with a benchmark or the performance of companies belonging to the same sector/industry:

• Revenue/Profit Growth: Top-line growth is the key, as without revenue growth a business cannot grow profits on a sustainable basis.
• Gross Profit/Operating Profit Margin.
• Profitability ratios, such as return on assets, return on equity and return on investment.
• Dividend yield: dividend expressed as a percent of current market price.
• Market Capitalization: Bigger companies have access to more financial resources and are better equipped to take competition head on.
Corporate governance.
• Business model.
• Brand power: Popular and universally recognizable brands offer a company an unique advantage over competition.
• Market Share.

Some Best Of Breeds

• Facebook Inc FB is the unparalleled leader in the social networking space, way ahead of rivals such as Twitter Inc TWTR, Snapchat, Microsoft Corporation MSFT's LinkedIn, Reddit, etc.
• First Solar, Inc. FSLR could take the title of the best of breed in the solar space, beating rivals such as SunPower Corporation SPWR fair and square.
• In the online retail space, Amazon.com, Inc. AMZN could be counted as the best of breed stock due to its dominant position, which hasn't been threatened yet by the entry of big brick-and-mortar stores into the online space. The value proposition offered by the company in the form of convenient shopping experience, wide assortment of products and competitive pricing has made it a favorite among investors.
• Among automakers, Toyota Motor Corp (ADR) TM makes the cut as the best in breed, beating the domestic Big three automakers. The Japanese company towers above the rest on several counts such as market capitalization, cash position and revenue growth.

The next time you venture out on the Street, it could well be worth to keep an eye on those best of breeds that could be safer bets to channelize your investment dollars. Even during trying times, these can preserve your hard earned money relatively better than the rest, and in better times, you can laugh all your way to the bank.