The consumer drives the U.S. economy, with more than $5.5 trillion in annual retail sales. Some of Wall Street's best investments have been companies that found their slice within this colossal pie.
Take Tractor Supply (TSCO 0.23%), for example. The company's stock has generated more than 68,000% in total investment returns over its lifetime.
Despite its success, the stock is still poised to deliver solid returns. Here's why investors should consider adding the stock to their long-term portfolio -- today.
The great outdoors is big business
Tractor Supply is an outdoors-focused retailer that sells a variety of gardening, pet, farming, and camping supplies to recreational farmers and others interested in the outdoors. The company has 2,164 stores across 48 states and does more than $14 billion in annual revenue. You can see below that it has been profitable for many years, with earnings per share (EPS) climbing right with sales.
TSCO revenue (TTM) data by YCharts. TTM = trailing 12 months.
Many of the world's largest retailers, like Walmart and Amazon, aim for consumers' general needs. But Tractor Supply has followed a playbook similar to Home Depot's, which uses the size and efficiency of a large chain business to meet a specific niche within the retail industry. But instead of home improvement, Tractor Supply targets outdoor hobbies, a greenfield of opportunity considering that much of America is rural once you leave major cities.
Sales have grown by an average of 14% annually over the past five years, so its recipe for growth is still a winner today. According to the Bureau of Economic Analysis, the outdoor recreation market is worth an estimated $454 billion, so the long-term opportunities still seem strong.
Returning profits to shareholders
Tractor Supply's business is pretty simple. Once a store opens, it doesn't need a lot of upkeep, which is how the company has grown increasingly profitable over the years. Management has steadily returned profits to investors, something shareholders in most companies ultimately seek.
The company routinely buys back its stock and has shrunken outstanding shares by more than 21% over the past decade. Lowering the number of shares helps grow EPS because Tractor Supply's profits get spread across fewer shares.
The company also pays a cash dividend and has raised it for 14 consecutive years. The dividend yield isn't tremendous at 1.7%, but it's a solid starting point for an investor who can buy and hold the stock and let those incremental raises compound over time.
Besides, the stock has outperformed the S&P 500 by 2 to 1 over the past decade on price alone, so shareholders are doing great.
A reasonable price for a proven winner
One might expect a stock with a long history of outperformance to come with a hefty price tag, especially when investors enjoy additional perks like share repurchases and dividends. Ironically, Tractor Supply seems reasonably valued at today's share price.
The stock trades at a price-to-earnings (P/E) ratio in line with its long-term average, which isn't bad if you're content paying a fair price for an outstanding stock. Analysts believe the company will grow its EPS by an average of 10% annually over the next three to five years, so investors can reasonably expect double-digit annual returns once you add in the dividend.
TSCO PE ratio (forward) data by YCharts.
It's not always the high-flying technology company or new industry stock that can generate the best investment returns. Tractor Supply has thrived by finding a need in a big market and dominating it. Investors can expect more of the same, and the stock is priced for them to profit from its continued success.
