What is “best-of-breed” in investing?

In dog shows, the highest-ranked dog of each breed wins a “best of breed” award. This terminology was brought over to the stock investing world to describe equities whose underlying companies are leaders in their industry.

I am not fond of the term “best of breed” for stocks, mainly because 1) companies aren’t animals, and 2) “best of breed” is a subjective label, meaning that different analysts can apply different criteria to justify their “best of breed” label on a stock. Common criteria to justify a “best of breed” label include: sales, dividend growth, market share, and corporate governance.

Since the term “best of breed” is not an apparently quantitative like the term “multibagger”, I consider the term “best of breed” as a salesman/marketing phrase.

When an analyst calls a stock “best of breed”, make sure that you find out the rationale for such a label, and how that makes the stock investable. Sometimes, market leading companies don’t make great investments because they’re either too expensive, or have already saturated their markets, suggesting slower future growth.

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