All investors hope to multiply their money tenfold, a hundredfold, or more. But if it were easy to pick a stock that was going to turn a modest investment into a pile of loot, everybody would be rich.
Still, there's a lot you can learn from looking at top-performing stocks that have done just that for their investors. Three stocks that would have turned a $10,000 investment into $60,000 -- or even more -- in just 10 years include Waste Connections (WCN -0.65%), Cintas (CTAS 0.14%), and XPO Logistics (XPO 2.27%). Here's how they did it...and what that can tell you about where to put your money today.
Top M&A-focused companies can experience explosive growth through acquisitions. Image source: Getty Images.
Taking out the trash
Trash hauler and landfill operator Waste Connections is the third-largest company of its kind in North America, behind Waste Management and Republic Services. However, being in third place gave the company more room to grow; a $10,000 investment in Waste Connections 10 years ago would now be worth $61,750, assuming you reinvested the dividends.
While the trash business has been booming lately -- thanks in large part to an increasing population -- a big part of Waste Connections' growth stemmed from its 2016 merger with No. 4 waste services provider Progressive Waste Solutions. Gobbling up its smaller competitor not only provided an immediate boost to the company's market cap, but put it on a faster growth trajectory, thanks in part to synergies between the businesses:
WCN Market Cap data by YCharts.
As the chart above shows, prior to the merger, Waste Connections was less than half as big as No. 2 Republic Services. Today, it's almost the same size. Organic growth isn't the only route to outperformance. A company can grow just as much -- or even faster -- by eating up competitors.
So when evaluating a company, don't just take into consideration its organic growth potential. Be sure to look also at the company's industry and whether there are any opportunities for growth through acquisition.
Dressed for success
Cintas, the largest uniform renter in North America, has made its share of big mergers and acquisitions, too. In some cases, these acquisitions have worked out for Cintas, like its purchase of the uniform division of rival G&K Services in 2017. In other cases, things didn't go as planned. Cintas' disappointing foray into document shredding resulted in a short-lived partnership with Shred-It in 2014 and a complete exit from the business in 2015.
You might be wondering what uniform rental and document shredding have in common. Well, they both can be primarily handled by a single employee making rounds in a delivery truck or van. The employee drops off clean uniforms and picks up the documents to be shredded and the soiled uniforms at the same time.
Even though document shredding didn't work out for Cintas, the company has successfully integrated other delivery businesses -- including floor mat rental, restroom restocking, and first aid and safety services -- into its business model. While these other lines of business contribute less revenue than the flagship uniform rental business (which accounts for about 80% of corporate revenue), they are growing at a faster rate. Put together, these services have helped a $10,000 investment in Cintas grow to $103,000 in just 10 years.
The bottom line: Even when a mature business seems to have little room to expand, it can find new streams of revenue in underserved, related markets. Cintas has executed that strategy excellently and looks like a good candidate for continued growth.
WCN Total Return Price data by YCharts.
The long and winding road
Looking at the chart above, you can see that Waste Connections' and Cintas' total returns over the last decade are impressive, but nowhere near as impressive as the gains of transportation and logistics specialist XPO Logistics. A $10,000 investment in XPO Logistics 10 years ago would be worth $186,000 today (and that's down from Q3 2018, when it would have been worth nearly $250,000).
XPO followed some of the same tactics as Waste Connections and Cintas. In a fragmented industry -- last-mile shipping and logistics -- it gobbled up competitors and used technology and economy of scale to improve efficiency for its customers. But XPO pursued a supercharged version of that strategy under acquisitive CEO Bradley Jacobs. A decade ago, the company was just a trucking brokerage -- connecting truckers and trucks with customers who needed them but couldn't afford a fleet of their own. Under Jacobs, its measly $177 million in annual sales ballooned to $17 billion, largely as a result of acquisitions.
However, XPO recently announced a shift in its strategy, from deploying cash for mergers and acquisitions to using it to buy back shares. Stunned investors, believing this to be a signal that the company's days of explosive growth were behind it, began heading for the exits. The departure of an unnamed major customer -- which is almost certainly Amazon -- has caused additional big headaches for the company.
There's a lot here to digest for investors. A company can't sustain double-digit growth indefinitely, and eventually it's going to reach a size where that growth slows. Sometimes, especially when making acquisitions, there's simply nothing around worth buying. And even for high-growth companies, an unexpected situation -- like the loss of a big customer -- can come like a bolt from the blue and upend a company's thesis. XPO is likely to keep growing, but investors may want to wait and see what its updated strategy looks like before buying in.
Investor takeaway
Acquisitions aren't the only way to grow, but they can supercharge a company's growth. On the flip side, a company that's acquired can also give investors a big payday in the form of a cash payout or stock in the acquiring company. When evaluating a company, be sure you consider its potential to acquire or be acquired.
