Rule Maker is a Foolish term that refers to companies that dictate how business is done in their sector. This can be accomplished through powerful brands ( like Coca-Cola ), patents, efficient operations, market share or sheer size (such as Microsoft ). As a result most of their competitors typically attempt to imitate their business model and are much smaller in size. Rule makers were often Rule Breakers in the past. As a result these companies tend to be mature large cap companies that pay dividends, although many can still be considered growth stocks.
Rule Maker investing is best suited to investors who prefer to trade infrequently, prefer less risk and try to have an indefinite holding period, ideally as long as possible. A Rule Maker investor has to be wary of ascendant aspiring rule breakers which could disrupt the rule maker's dominance.
Rule Maker Criteria
For a stock to be considered a Rule Maker, it must meet these ten criteria
- Have at least one sustainable competitive advantage
- Be dominant in its industry.
- Have an established history of dominance, ten years or more
- Have a strong Free Cash Flow, Cash King Margin above 10%
- Be efficient at managing capital, Foolish flow ratio below 1.25
- Sales must be above 4 billion per annum and revenues must grow 10% or better per year
- Have Top Notch Management
- Have a high Return on Invested Capital, above 11%
- Have a strong balance sheet, usually with cash in excess of 1.5 times total debt
- Stock Price must be trading a discount to intrinsic value