In the age of artificial intelligence, investors seem to be falling over themselves to find the next big thing in AI. However, not every AI stock is going to be the next Nvidia, and if history is any lesson, most will probably underperform the market. Just take a look back at the dot-com bust, or more recent hype cycles around 3D printing, cannabis stocks, or cryptocurrencies.
By its nature, investing works best if you find a stock that others have ignored, one whose price isn't being inflated because it's the flavor of the month. These under-the-radar stocks tend to offer the best value on the market, and many of them have long track records of delivering superior returns.
One such stock that you should probably know more about is Old Dominion Freight Line (ODFL -7.24%). Old Dominion (OD) is by no means a household name, but the less-than-truckload (LTL) freight carrier has delivered life-changing returns for early investors. Check out the chart below.
Not only has the company turned $3,000 invested in its 1991 initial public offering (IPO) into more than $1 million, but it's also beaten the S&P 500, of which it's a member, by a comfortable margin in any meaningful time frame.
Investors don't generally look to the trucking sector to find blowout returns, but Old Dominion's success is proof that even boring stocks can be big winners. Let's take a deeper look at what's driven Old Dominion's outperformance and whether the stock can continue to do so.
Image source: Getty Images.
The secret to Old Dominion's success
If you're wondering whether Old Dominion has a competitive advantage, you only have to look at the company's operating ratio, an industry metric that's the inverse of operating margin. In its most recent quarter, the company posted an operating ratio of 70.6%, meaning it keeps nearly 30% of revenue before interest and taxes even in a challenging economic environment like the current one.
The chart below shows that Old Dominion has a comfortable profit-margin lead against two pure-play LTL peers, Saia and XPO.
ODFL Operating Margin (Quarterly) data by YCharts.
Old Dominion is able to achieve those superior margins by being a best-in-class operator. Put another way, the company's on-time rates and damage ratio are tops in the industry, posting 99% on-time service in Q3 and just a 0.1% cargo-claims ratio. As CEO Marty Freeman put it:
The consistency of our best-in-class service has continued to differentiate Old Dominion in the marketplace, which we believe supports our ongoing yield-management initiatives and ability to win market share over the long term.
The company has been in business for nearly 100 years and has a sterling reputation among its customers -- in part because of the customer-service statistics above -- so it's able to both charge a premium price and gain market share from competitors.
Old Dominion also just won its 14th consecutive Mastio Quality Award, given by logistics professionals annually to the No.1 national LTL carrier. It ranked No. 1 in 25 of 28 categories in the survey, more evidence that it's head and shoulders above the competition.
As one more sign of how respected OD is in the industry, XPO stock soared 18% in one day in April after the company hired Dave Bates, Old Dominion's former senior vice president of operations, and made him chief operating officer. For a stock to jump double digits on a new COO announcement simply doesn't happen under normal circumstances, and that shows what's so special about OD.
Can Old Dominion Freight Line stock make you rich?
Based on the information above, it's clear that OD's reputation is just as strong as ever. The company also just announced a 4.9% general rate increase, its annual price hike, which should help grow revenue and profits next year.
At a market cap around $42 billion, the stock is unlikely to deliver the kind of blowout growth it did early in its history, as its ability to rapidly expand is constrained by competition and the size of the market. After all, this is an asset-based business where scaling up means adding trucks, terminals, and drivers, and that doesn't happen overnight. And at recent prices, Old Dominion trades at a price-to-earnings ratio of 34, which represents a premium compared to its historical levels. But that's still lower than its valuation during much of the pandemic, and the company should benefit from a rebound in the trucking industry next year as inventory levels have now normalized at most retailers.
Based on its reputation and track record of execution, Old Dominion looks like a good bet to continue to beat the market. This is the kind of high-quality stock that is worthy of a position in almost any portfolio.
