8 Outperforming stocks to buy now (Part 1)

For the vast majority of investors looking to select individual stocks that will outperform the market, they tend to fall short. While I am not against buying individual stock counters (I do so myself), the reality is that most stock selections by retail investors fail to live up to their expectations.

Everybody wants to find the next Netflix or Amazon. Who doesn’t?

In this article, I am not looking to discover the next 100-bagger but to highlight 8 Outperforming Stocks that you can consider strategically adding into your portfolio. To qualify, these stocks need to demonstrate both long-term outperformance track record as well as exhibit short-term price momentum acceleration.

That is why among the 500 S&P counters, only 8 meets these stringent criteria. These stocks are screen on outperforming the S&P500 market by a certain percentage point over 5 days, 10 days, 1 month, 3 months, YTD, 6-months, 1 year, 2 years, 5 years and 10 years.

Yes, these 8 outperforming stocks beat the market on all these time frames. Essentially, they are extremely consistent price performers. They might not be your next Netflix or Amazon, but betting on these consistent price performers will give you a larger than average probability of beating the market regardless of macro volatility, in my view.

Combined, a portfolio holding equal weighting of these 8 stocks over the past 10 years would have generated 1170%. A 10k portfolio at the start of the decade would now have a current market value of $117,000. Not too bad.

Comparatively, the S&P500 appreciated by 220% during the same duration.   

Without further ado, these 8 outperforming stocks that crush the market in the last 10 years are:

Outperforming Stock #1: Apple

Business Summary

The counter needs no introduction. Apple designs a wide variety of consumer electronic devices, including smartphones (iPhone), tablets (iPad), PCs (Mac), smartwatches (Apple Watch), and TV boxes (Apple TV), among others.

The iPhone makes up the majority of Apple’s total revenue. Also, Apple offers its customers a variety of services such as Apple Music, iCloud, Apple Care, Apple TV+, Apple Arcade, Apple Card, and Apple Pay, among others. Apple’s products run internally developed software and semiconductors, and the firm is well known for its integration of hardware, software, and services.

Apple’s products are distributed online as well as through company-owned stores and third-party retailers. The company generates about 40% of its revenue from the Americas, with the remainder earned internationally.

Financial Statement Summary

Apple has been a rather consistent performer in terms of top-line and bottom-line growth. From 2015-2019, revenue increased from US$235bn to US$268bn or a CAGR of 3.3%. The company has also been a consistent purchaser of its shares, a corporate action that has been scorn at of late due mainly to the buyback controversies surrounding airlines.

Consequently, EPS grew at a faster CAGR of 7.7% over this period. The strong price appreciation of Apple, however, is due to the huge uplift in terms of its PER multiple which has increased from a mere 11.4x back in 2015 to the current level of 24.7x based on 2019 earnings.

Apple is lightly geared at present and is probably one of the last companies on Earth to face funding pressure despite COVID-19 disrupting its retail operations to a fairly large extent.

The company generates quite a sizable amount of free cash flow per share of $14.4 which translates to a current Price / FCF multiple of 21.5x.  

The company’s ROE has been impressive at 64% as of end-2019, largely due to its enormous shareholder equity reduction from its share buyback. ROIC has also been hovering in the high 20s, a very strong ratio.

Apple has been growing its dividend steadily over the last 5 years and currently yields c.1%, not attractive enough to be considered a yield play.    

Analyst consensus

Among the 26 analysts that cover the counter, most are hugely positive on the stock with 17 analysts in the street rating the stock a Strong BUY.

Outperforming Stock #2: Adobe

Adobe’s outstanding outperformance against the S&P500 has mainly come from the last 5 years.

Business Summary

Adobe provides content creation, document management, and digital marketing and advertising software and services to creative professionals and marketers for creating, managing, delivering, measuring, optimizing and engaging with compelling content multiple operating systems, devices and media.

The company operates with three segments: digital media content creation, digital experience for marketing solutions, and publishing for legacy products (less than 5% of revenue).

We recently featured Adobe as one of 4 stocks with more than 80% recurring revenue owned by Gurus. The recurring revenue ratio for Adobe is more than 90%.

It was not too long ago in 2013 when Adobe had about $200m in annual recurring revenue. In its last fiscal Year 2019, the company generated $10bn in recurring subscription revenue.

Financial Statement Summary

An almost picture-perfect Income Statement with revenue growing by a CAGR of 23.5% over the last 5 years to US$11.2bn. Adobe’s EPS has been even more impressive, increasing by a CAGR of 48% to S$6/share as of end-2019. The company has also been active in buying back its shares with outstanding share count decreasing from 507m in 2015 to 488m in 2019.

The only “downside” is that its trailing PER ratio is at a hefty 55x. Well, the counter has never been treated as a value stock in the first place.

Adobe has a strong balance sheet, with the company only in a marginally net debt position of $540m which is extremely well-covered by its free cash flow generation of c.US$4bn/year

Again, another counter with a strong ROE ratio of 28% and an ROIC ratio of 21% based on 2019 results, well above my internal requirement of 15% for ROIC.

All-in-all, a fantastic company to own with a high level of revenue visibility, even in today’s climate of elevated business uncertainty. However, that is assuming you find its elevated PER of 50+x palatable.   

Analyst consensus

With 20 analysts covering the stock and ¾ of them issuing a Strong Buy on the counter, there is no doubt that the street is extremely positive on the future outlook of Adobe.

I like the stock as well and will be a buyer of dips.

Outperforming Stock #3: Clorox

Business Summary

With a history dating back more than 100 years, Clorox now sells a variety of consumer staples products, including cleaning supplies, laundry care, trash bags, cat litter, charcoal, food dressings, water-filtration products, and natural personal-care products.

Beyond its namesake brand, the firm’s portfolio includes Liquid-Plumr, Pine-Sol, SOS, Tilex, Kingsford, Fresh Step, Glad, Hidden Valley, KC Masterpiece, Brita, and Burt’s Bees. Around 85% of Clorox’s sales stem from its home turf.

Clorox is a quality dividend aristocrat that has increased its dividend for 42 consecutive years. The counter currently yields about 2.1% which is slightly below the industry average of 2.4%.

Financial Statement Summary

Clorox’s revenue has not been very impressive, to say the least, growing at a CAGR of just 1.9% over the last 5 years. Pretty much understandable for a consumer staple stock. The company’s EPS has been growing at a faster clip of 5.2% CAGR during this period.

The counter was previously trading at a trailing PER multiple of around 23x before the outbreak of COVID-19 that has seen Clorox becoming one of the strongest beneficiaries of this health pandemic due to its portfolio of cleaning products which has been highly sought after in this crisis.

At its present price of $204 with an expected forward EPS of $6.60, the counter is trading at a hefty 31x forward PER, a premium relative to its historical PER range.

While Clorox’s net debt of close to $3bn as of end-2019 seems high relative to its equity base of $555m, this is well-supported a strong free cash generation of close to $1bn/annum.

The company also has a strong ROIC ratio of c.27% at the moment. Seems like most of these outperforming stocks have high ROIC as a common criterion.

Lastly, as mentioned, Clorox is a Dividend Aristocrat with a 42 years track record of consecutively increasing its dividend payment. With 2019 DPS of S$4.04 vs. 2019 EPS of $6.38, this translates to a payout ratio of 63%, below my 70% benchmark for dividend players.  

Analyst Consensus

The street is not overly positive on Clorox with a consensus Hold rating across 10 analysts covering the stock. I do concur with being a tad cautious on Clorox which could see demand for its cleaning products taper off once the COVID-19 issue becomes a thing of a past, or will it ever?  

Outperforming Stock #4: Fastenal

Business Summary

Fastenal opened its first fastener store in 1967 in Winona, Minnesota. Since then, Fastenal has greatly expanded its footprint as well as its products and services. Today, Fastenal serves its 400,000 active customers through approximately 2,100 stores, almost 1,200 on-site locations, and 14 distribution centers.

Since 1993, the company has added other product categories, but fasteners remain its largest category at about 30%-35% of sales. Fastenal also offers customers supply-chain solutions, such as vending and vendor-managed inventory.

Shares of Fastenal rose 16% in April due to a strong set of 1Q20 results which beat the street’s expectations despite Fasteners, the industrial firm’s namesake product line, saw a 10% drop in daily sales in March. However, due to its diversification strategy, its range of safety products increased by 31%.

Financial Statement Summary

Another company with a strong track record of growing its revenue consistently, Fastenal’s revenue CAGR grew at 8.4% over the last 5 years with EPS growing at a slightly faster clip of 11.7%.

Share buyback has been rather marginal during this period while its PER multiple has inched up in 2019. According to the street’s expectation, Fastenal 2020 EPS is forecasted at $1.21, translating to a Forward PER multiple of 32x, significantly more than the average PER multiple in the mid-20s

Net debt of $416m as of end-2019 is well covered by a year free cash flow of close to $600m. The company generates a high ROIC of 25% based on its 2019 results.

Fastenal’s DPS growth has been very strong, growing at a CAGR of 11.6% over the past 5 years, with the current payout ratio of 63% based on 2019 results.

Analyst Consensus   

The counter is covered by 11 analysts in the street with the majority of them giving a Hold rating to the stock.

Conclusion

This is Part 1 of 2 in identifying 8 Outperforming Stocks that you can consider adding to your portfolio. As you might already notice, a common ratio that fares well for these outperforming stocks is a high ROE%/ROIC%.

This is also a Warren Buffett favorite ratio which he uses to gauge the efficiency of companies to generate profits using its capital.

Another common trait is that all these companies generate tons of free cash flow. While all of them operate with a certain amount of debt, their debt holdings are very well-covered by their free cash flow generation.

In our next article, we will discuss the next 4 Outperforming Stocks that you can consider strategically add to your portfolio.

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Disclosure: The accuracy of the material found in this article cannot be guaranteed. Past performance is not an assurance of future results. This article is not to be construed as a recommendation to Buy or Sell any shares or derivative products and is solely for reference only.