Want your stocks to outperform index funds? Look at companies that use one core metric.
Long-term investors have benefited from index funds, which often charge very low fees and can be difficult for active portfolio managers to beat. However, some investors like to select individual stocks as part of their portfolio. Selecting them can be very difficult, but looking at their superior financial performance over the long term can be a great way to start your own research.
If your goal is growth, you can kill it quickly by trying to pinpoint the next hot trend or series of trends that other investors haven’t already seen and bid on. I hope you get good results.
The extensive indexing approach worked well. For example, the S&P 500 SPX returned 554% over the past 20 years through February 9, for an average annual return of 9.8%, according to FactSet. (All returns in this article include reinvested dividends.) In a note to clients on February 12, Ned Davis Research analyst London Stockton looked at nearly 100 years of market data and found that the average annual return for the S&P 500 was 10.2%. I wrote it. %, “excluding expenses.” “During this period, there were no negative periods for 20 to 30 years and 96.6% of the 10-year periods were positive periods,” he added.
One easy way to follow the US benchmark index is to own shares of the SPDR S&P 500 ETF Trust SPY.,
The annual cost compared to operating assets amounts to 0.0945%, and over the past 20 years, it has recorded a return of 542%, or an average annual return of 9.7%. There are also newer S&P 500 index funds that have lower fees than SPY.
For individual stocks, a company’s return on invested capital can reveal how good operating performance is correlated with good stock performance over the long term.
20 years of screens
A company’s return on invested capital is net income divided by the sum of the book value of common stock, preferred stock, long-term debt, and capitalized lease obligations.
ROIC is an annual figure that highlights how efficiently management allocates capital, i.e., how well it utilizes the money investors provide to run the business. Because various industries are naturally more capital-intensive than others, there is not necessarily a fair way to evaluate performance. But when you look at the stock market broadly, it doesn’t have to be fair.
The book value of a company’s stock may be much lower than its current market capitalization. The company may have issued most of its shares years ago at a much lower price than the current price. If a company has recently issued a large number of new shares or issued them at a relatively high price, its ROIC will be lower. If a company has less debt, its ROIC is higher. ROIC will fall, especially if interest rates rise and the company has to increase borrowing.
We recently included 5- and 10-year lookbacks for ROIC as part of our analysis of the top 10 components of the S&P 500 by market capitalization. This allows us to isolate which components may represent the best value for investors.
But today we are taking a more extreme approach, looking back 20 years.
FactSet calculates a company’s ROIC quarterly for a period of four consecutive quarters. Because many companies’ fiscal years do not align with the calendar, the most recent ROIC calculation includes each company’s last four quarterly financial reports.
In our 20-year screen for the S&P 500, we start with the current ROIC figure and move forward four fiscal quarters, eight fiscal quarters, and so on, resulting in 20 12-month ROIC snapshots relative to the 20-year average. .
Twenty years of ROIC data is available on FactSet for 342 companies in the S&P 500, and 20-year total returns are available for all but six companies. FactSet can have 20 years of ROIC data, even for companies that haven’t been publicly traded for 20 years (e.g. Alphabet Inc. GOOGL).
It was listed as Google Inc. in August 2004.
Of the remaining 336 companies in the S&P 500, these 20 have had the highest average return on invested capital over the past 20 years.
| company | ticker | 20-year average ROIC | 10-year average ROIC | Return, 20 years | Average 20-year return | Return, 10 years |
VeriSign Co., Ltd. | VRSN, | 241.9% | 460.9% | 1,166% | 13.5% | 277% |
Accenture PLC Class A | ACN, | 54.0% | 39.9% | 2,167% | 16.9% | 451% |
Autozone Co., Ltd. | Ajo, | 36.7% | 40.3% | 2,884% | 18.5% | 401% |
HP Corporation | HPQ, | 36.6% | 63.7% | 306% | 7.3% | 190% |
Idexx Laboratories Inc. | IDXX, | 36.3% | 47.6% | 4,379% | 20.9% | 863% |
Paychex Co., Ltd. | PAYX, | 36.3% | 38.3% | 531% | 9.7% | 306% |
Yum Brands Inc. | Yum, | 33.0% | 40.3% | 1,464% | 14.7% | 204% |
Apple Corporation | AAPL, | 33.0% | 37.5% | 55,015% | 37.1% | 1,055% |
Colgate-Palmolive Co. | CL, | 32.6% | 29.9% | 382% | 8.2% | 73% |
S&P Global Corporation | SPGI | 32.5% | 32.9% | 1514% | 14.9% | 510% |
Monster Beverage Co., Ltd. | MNST, | 32.5% | 24.1% | 51,682% | 36.7% | 388% |
TJX Co., Ltd. | T.J.X., | 31.1% | 28.1% | 2,086% | 16.7% | 281% |
Ross Stores Co., Ltd. | roasting, | 30.9% | 28.9% | 2,235% | 17.1% | 364% |
Rollins Corporation | role, | 28.9% | 26.7% | 2,601% | 17.9% | 491% |
Lockheed Martin Corporation | LMT, | 28.8% | 29.9% | 1,408% | 14.5% | 262% |
FactSet Research Systems Inc. | FDS, | 28.7% | 26.9% | 2,279% | 17.2% | 414% |
CH Robinson Worldwide Ltd. | CHRW, | 28.4% | 24.5% | 455% | 8.9% | 80% |
Tapestry Co., Ltd. | TPR, | 28.0% | 11.7% | 225% | 6.1% | 21% |
NVR Co., Ltd. | NVR, | 27.3% | 27.3% | 1,461% | 14.7% | 527% |
Automatic Data Processing Co., Ltd. | ADP, | 27.3% | 33.6% | 1,062% | 13.0% | 374% |
S&P 500 | SPX | 554% | 9.8% | 237% | ||
SPDR S&P 500 ETF Trust | spy | 542% | 9.7% | 235% | ||
Source: FactSet | ||||||
Click on the ticker to learn more about each company, fund or index.
Click here for Tomi Kilgore’s detailed guide to a wealth of information available for free on the MarketWatch quotes page.
For comparison, total and average annual returns for the S&P 500 and SPY are included at the bottom of the table. Of these 20 companies, 15 outperformed the S&P 500’s 20-year return. Apple Inc. AAPL,
It has the best returns over 20 and 10 years. Over the decade, Apple’s earnings were behind NVR Inc., the second-best performer on the list. It was twice as big as the NVR.
And Apple’s 10-year average ROIC was higher than its 20-year average ROIC.
Mastercard Co., Ltd. MA,
With a 20-year average ROIC of 37.6%, this company would be in the top 20. However, the company went public only in May 2006. The company’s 10-year average ROIC was 46.2%. Over the past 10 years, the stock has returned 538%.
VeriSign Inc. VRSN,
It has the highest ROIC among the S&P 500. The company holds exclusive rights granted by the Department of Commerce to maintain domain registration for “.com” and “.net” Internet addresses. In a September interview, Brad Klapmeyer, managing director and senior portfolio manager at Ivy Investments, said VeriSign’s contract with the Commerce Department had been changed in recent years to increase pricing flexibility and that the simplicity of the company’s business made the move necessary. There is little investment capital to finance operations.
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