Want your stock picks to beat index funds? Look at companies with one key metric.
If you’re looking for stock picks that outperform index funds, one key metric to consider is a company’s return on invested capital (ROIC). A high ROIC indicates efficient capital allocation and strong operating performance, which are often correlated with good stock performance.
In a recent analysis of the largest companies in the S&P 500, we found that companies with higher ROICs tend to deliver better returns for investors. But today, we’re taking an even more extreme approach by looking back 20 years to identify the best performers.
Out of the 342 companies in the S&P 500, we have 20 years of ROIC data for 336 of them. Among these companies, we’ve identified the top 20 with the highest average returns on invested capital over the past two decades. These companies include VeriSign Inc., Accenture PLC Class A, AutoZone Inc., HP Inc., Idexx Laboratories Inc., Paychex Inc., Yum Brands Inc., Apple Inc., Colgate-Palmolive Co., S&P Global Inc., Monster Beverage Corp., TJX Cos. Inc., Ross Stores Inc., Rollins Inc., Lockheed Martin Corp., FactSet Research Systems Inc., C.H. Robinson Worldwide Inc., Tapestry Inc., NVR Inc., and Automatic Data Processing Inc.
Notably, Apple Inc. has delivered the best returns over both the past 20 years and the past 10 years. Its average 10-year ROIC stands at an impressive 46.2%, and the stock has returned a remarkable 538% over the past decade. VeriSign Inc., on the other hand, has the highest ROIC among all S&P 500 companies, thanks to its exclusive right to maintain domain registrations for “.com” and “.net” internet addresses, granted by the Commerce Department.
Long-term investors have traditionally fared well with index funds, thanks to their low fees and difficulty for active portfolio managers to beat. However, for those looking to invest in individual stocks, examining the financial performance of companies with a long-term view can be a great starting point for research. Your objective as an investor should be at the heart of your decision-making. For example, if you’re seeking dividend income, focusing on companies that consistently increase their dividend payouts can be a sound approach. On the other hand, if growth is your objective, identifying emerging trends before other investors do can lead to significant gains.
In summary, while selecting individual stocks can be challenging, analyzing the long-term performance of financially strong companies can provide valuable insights. Companies with high ROICs have historically outperformed the index, making them worth considering for investors seeking to beat the market.
Analyst comment
Positive news: The article highlights the importance of considering a company’s return on invested capital (ROIC) as a key metric for outperforming index funds. It provides a list of the top 20 companies with the highest average ROIC over the past 20 years, including Apple Inc. as the best performer.
Analyst’s view: Investing in companies with high ROICs can potentially lead to better returns than index funds. Investors should consider the long-term financial performance of these strong companies for potential market-beating opportunities.
