The main goal of being an active stock picker is to find investments that can beat the market over the long term. Otherwise, owning an index fund might be the best course of action. Even Warren Buffett thinks so.
But if finding individual stocks is your goal, perhaps it's a good idea to look at previous winners to gain insights into the qualities that lead to outperformance. Procter & Gamble (PG -0.78%), whose shares have skyrocketed a ridiculous 4,710% in the past four decades, is a good example. That gain crushes the 2,590% rise of the S&P 500 during the same time period.
This means that a $10,000 investment in the top consumer staples stock in August 1983 would be worth a whopping $480,000 today. Let's take a closer look at what helped drive such a tremendous investment return.
Favorable qualities
One of the key reasons for Procter & Gamble's long history of success has undoubtedly been its product portfolio. The business sells popular branded items like Old Spice deodorant, Bounty paper towels, Swiffer sweepers, Tide laundry detergent, and Pampers diapers that drive customer loyalty over long periods of time.
The industry doesn't invite much technological disruption like an internet company would have to deal with constantly, so Procter & Gamble benefits from durable demand from consumers. This is an underrated characteristic that deserves a lot more attention from investors. Instead of trying to find companies that can grow revenue at the fastest clip, which is likely not sustainable, it's better to identify businesses that can increase sales at a healthy rate for a long period of time. And this comes from selling products that don't change much.
By offering in-demand products for many decades, Procter & Gamble has developed a powerful brand competitive advantage. The strong brand recognition has resulted in pricing power. Consumers need these products in their day-to-day lives, and they have developed a level of trust and dependence on them, so they aren't likely to switch to an inferior offering from a rival just to save a few bucks.
This is true even today, as Proctor & Gamble was able to increase revenue 5% in the latest quarter (Q4 2023 ended June 30), which was boosted by raising prices.
It's very encouraging to see that the business is still able to do this given the uncertain economic environment. Buffett certainly appreciates this trait, as he's said previously that pricing power is a priority when looking for companies to invest in. Procter & Gamble fits the description here.
Unsurprisingly, outstanding stock performance, especially more recently, has not only been driven by the qualitative factors I mentioned, but also solid financial performance. While the company's revenue has increased at a compound annual rate of 4.2% over the past five fiscal years, thanks to operating leverage net income has risen at a slightly faster pace than the top line. And because of management's friendly capital-allocation policies, the share count continues to be reduced, boosting earnings per share figures.
Is the stock a buy now?
It's hard not to appreciate Procter & Gamble's historical financial performance. This business might not be the most exciting, but the stock's gains speak for themself. Even in the past five years, its shares have outperformed the S&P 500 by a wide margin.
Right now, the stock trades at a forward price-to-earnings ratio of 24. That's a premium to the S&P 500's valuation. However, the company's track record, plus its dividend history of increasing its payout for 67 straight years, might be compelling for investors looking for a safe, steady, reliable business to own. To be clear, I don't think the stock will produce the same return over the next 40 years, but Procter & Gamble deserves some attention.
