A long-term analysis on returns on invested capital shows that the best financial operators tend to beat the S&P 500’s returns
Long-term investors have been well served by index funds, which often charge very low fees and can be hard for active portfolio managers to beat. But some investors want to select individual stocks for portions of their portfolios. While it can be very difficult to pick those, a long-term look at quality financial performers might be an excellent way to begin your own research.
A broad indexing approach has worked well. For example, the S&P 500 SPX has returned 554% over the past 20 years through Feb. 9, for an average annual return of 9.8%, according to FactSet. In a note to clients on Feb. 12, Ned Davis Research analyst London Stockton wrote that a look at nearly 100 years of market data showed that the S&P 500 had an average annual return of 10.2%, “excluding costs.” He added: “During this time there have been no negative 20- or 30-year periods, with 96.
A 20-year screen A company’s return on invested capital is its net income divided by the sum of the carrying value of its common stock, preferred stock, long-term debt and capitalized lease obligations. We recently included five- and 10-year lookbacks at ROIC as part of an analysis of the largest 10 components of the S&P 500 by market capitalization, in order to isolate which ones might represent the best value for investors.FactSet calculates companies’ ROIC each quarter for rolling four-quarter periods. Since many companies have fiscal years that don’t match the calendar, the most recent ROIC calculations encompass each company’s past four quarterly financial reports.
For the remaining 336 companies in the S&P 500, these 20 have had the highest average returns on invested capital over the past 20 years:Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.
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