Want your stock picks to beat index funds? Look at companies with one key metric. – MarketWatch

If your goal is growth, you may want to strike it rich by pinpointing the next hot trend, or set of trends, that other investors haven’t yet identified and bid on. I wish you the best.

An extensive indexing approach worked well for me. For example, the S&P 500 SPX returned 554% over the past 20 years through Feb. 9, for an average annual return of 9.8%, according to FactSet. (All returns in this article include reinvested dividends.) Ned Davis Research analyst London Stockton said in a Feb. 12 note to clients that the nearly 100-year He writes that an examination of market data shows that the average annual return for the S&P 500 is 10.2. %, “excluding cost”. He added, “During this period, there was never a negative 20- or 30-year period, and 96.6% of the 10-year periods were positive.”

One easy way to track the US benchmark index is to own shares of SPDR S&P 500 ETF Trust SPY.,
Its annual expenses are 0.0945% of assets under management, and it has returned 542% over the past 20 years, with an average annual return of 9.7%. There’s also a new S&P 500 index fund that has lower fees than SPY.

For individual stocks, a company’s return on invested capital can reveal the correlation between strong financial results and good stock performance over time.

20 years of screens

A company’s return on invested capital is its net income divided by the sum of the carrying amounts of common stock, preferred stock, long-term debt, and capitalized lease obligations.

ROIC is an annualized number that shows how efficiently management allocates capital, or how well it utilizes the funds provided by investors to operate the business. This is not necessarily a fair way to evaluate performance, as different industries are naturally more capital intensive than others. However, there is no need to be unbiased when looking at the stock market broadly.

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 amount of new stock or issued new stock at a relatively high price, the ROIC will be lower. If a company has less debt, its ROIC will be higher. ROIC decreases when a company is forced to increase its borrowings, especially as interest rates rise.

We recently included 5-year and 10-year ROIC retrospectives as part of our analysis of the top 10 stocks in the S&P 500 by market capitalization. This is to identify the stocks that offer the most value to investors.

But today, we look back 20 years and take a more extreme approach.

FactSet calculates a company’s ROIC quarterly over four rolling quarters. Because many companies’ fiscal years don’t match the calendar, his latest ROIC calculation includes each company’s last four quarterly financial reports.

A 20-year screen for the S&P 500 starts with the current ROIC numbers, then goes to numbers from 4 fiscal quarters ago, then 8 quarters, and so on, and then takes 20 12-month ROIC snapshots that represent the 20-year average. I created one. .

Of the S&P 500, 20-year ROIC data is available from FactSet for 342 companies, and 20-year total returns are available for all but six companies. FactSet may have 20 years of his ROIC data, even for companies that haven’t been publicly traded for 20 years. For example, Alphabet Inc. GOOGL,
-0.84%
went public as Google Inc. in August 2004.

Of the remaining 336 companies in the S&P 500, the following 20 companies have had the highest average return on invested capital over the past 20 years.

Click on the ticker to see details about each company, fund, or index.

Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on MarketWatch’s quotes page.

For comparison, the total and average annual returns for the S&P 500 and SPY are shown at the bottom of the table. Of these 20 companies, 15 outperformed his 20-year return of the S&P 500. Apple Inc. AAPL,
-1.01%
The 20-year and 10-year returns were the best. During this decade, Apple’s profits were twice that of NVR Inc., his second best performing company on the list.
+1.52%.
And Apple’s 10-year average ROIC is higher than its 20-year average ROIC.

MasterCard Co., Ltd. MA,
+0.07%,
A 20-year average ROIC of 37.6% would have put it in the top 20 list, but the company only went public in May 2026. His 10-year average ROIC for the company was 46.2%. The company’s stock has returned 538% over the past 10 years.

VeriSign Inc. VRSN,
-1.11%
The company has by far the highest ROIC in the S&P 500. The company has exclusive rights granted by the Department of Commerce to maintain domain registrations for “.com” and “.net” Internet addresses. Brad Klapmeyer, managing director and senior portfolio manager at Ivy Investments, said in a September interview that VeriSign’s deal with the Commerce Department has changed in recent years to allow for more flexibility in pricing. Due to the simplicity of the company’s business, there is little investment capital to finance operations.

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