Investors who put money into stocks hope for the greatest capital gains and dividends possible. Companies that have fulfilled this wish are included in the Value Creator List from the Boston Consulting Group, which recently published the rankings for 2016. These include the Total Shareholder Returns (TSR) of approximately 2,000 companies worldwide from 2011 to 2015. According to the results, the median company in the database achieved an average annual TSR (combination of share price gains and dividend yield) of 12.2 percent. This compares with an average annual TSR of 34.7 percent to 75.3 percent delivered by the top 10 large-cap value creators.
That sounds like an interesting source for investors in search of stocks worth buying. Some valuable conclusions can be drawn by looking at the large cap top 10 list. Seven of these global large-cap companies come from the U.S. The 28 industry groups also include a significant number of value creators headquartered in the U.S.
It is worth noting that the top 10 list is dominated by pharma/biotech-companies (4). The media and publishing sector is also strongly represented with three companies. Two technology companies and one communication service provider complete the list.
Consistency is rare
More striking is the fact that few companies manage to permanently maintain their top position. Among this year’s 10 winners from the large-cap space, only the seventh-place social media company Tencent from China managed to be represented more than three times among the top 10. With Regeneron, Netflix, Visa, KDDI and MasterCard, five newcomers appear on the large-cap top 10 list for the first time. Allergan, Naspers and Biogen are in the top 10 for the second time, and Gilead for the third time.
Frank Plaschke, BCG partner and co-author of the study, explains why it is so difficult to maintain the position of the top performers: “Over time, companies tend to align with the average market performance. To become a top-value creator, a company must clearly exceed the expectations of investors again and again and deliver results that fundamentally transform the trajectory of the business.”
Altogether, in the 18 years the Boston Consulting Group has been publishing the Value Creator rankings, 89 companies have made it into the large-cap top 10, but more than half (46) have done so only in a single five-year period. Roughly 21 percent have appeared in the top 10 rankings for three years or more. The only company to surpass Tencent’s staying power (six times) has been Apple, with nine appearances. But in the last three editions, even Apple failed to make the cut.
“It’s not impossible for a company to ‘beat the fade’ to average performance, but it is a high-wire act that is difficult to sustain,” the Boston Consulting Group’s analysts say.
Defending their place among the top performers is also hard for those at the top of the list because as companies grow, it is increasingly difficult to find new areas of growth. That may also explain why it was not possible in the past to beat the overall U.S. stock market by simply buying the stock with the highest market capitalization. As data from Ned Davis Research shows, the S&P 500 Index not only has beaten the performance of the biggest company on the U.S. stock market in the long run, but has also outperformed the 10 biggest companies after they reached that status.
Five picks from the U.S.
These findings have implications for the right stock selection approach that investors should apply. To find the companies able to deliver superior results in the future, it is obviously not enough to simply buy the winners from the past. Fortunately, the likelihood of investing one’s money successfully can be improved by choosing top value creators with a completely intact stock price uptrend. It is also recommended that investors avoid stocks where the valuation has gotten out of hand. However, that is not so easy to follow, since the valuations in general are not really cheap nowadays.
Keeping these two recommendations in mind, the list with current interest among buying candidates out of the 128 top 10 members of the 28 industry groups examined by the Boston Consulting Group is getting quite short. From the U.S., for example, the following five companies make the cut: The world’s largest arms maker by sales, Lockheed Martin Corp.; the second largest U.S.-tobacco company, Reynolds American Inc.; the holding company for insurance, reinsurance and investment operations, Markel Corp.; off-price retailer of apparel and home fashions, TJX Companies Inc.; and the world’s largest generator of renewable energy from wind and sun, Nextera Energy Inc.
Nextera Energy has achieved a TSR of 18.8 percent p.a. in the past five years, and its expected growth rate of 7.2 percent for the next five years does not look too ambitious. The estimated price earnings ratio for 2017 is 18.
As for TJX, this valuation figure stands at 19.5, and it goes hand-in-hand with an expected yearly growth rate of roughly 10 percent for the next five years.
With an estimated price-earnings-ratio of 32.5 and an expected earnings growth rate of approximately 11 percent, Markel at first glance does not look too attractive, but this is offset by good management and a stock price that has appreciated with only temporarily interruptions since 1991.
With a stock price that went from $1 to $245 from 1997 until 2016, Lockheed Martin also looks like a top choice. The price-earnings-ratio for 2017 is 17.3 and the estimated earnings growth rate for the next five years is almost 10 percent. Reynolds American’s stock also has a long-term uptrend, with a price-earnings-ratio for 2017 of roughly 19 and an estimated earnings growth rate of 12.2 percent.
The risk of a negative development with a chosen stock, which can never be completely ruled out, can and should as always be minimized by the use of stop-loss orders.