When Warren Buffett speaks, we Fools love to listen. After all, with so many different stock-picking systems out there, it's useful to know exactly what the Oracle himself looks for in a purchase.

For example, in the 1992 Berkshire Hathaway annual report, Buffett shared this extra-golden nugget of investment wisdom: "The best business to own is one that -- over an extended period -- can employ large amounts of incremental capital at very high rates of return." Simple, right?

In today's fast paced, info-overloaded financial world, it's easy for investors to forget that companies exist for one basic purpose: to take money from investors and earn a return on it. It only makes sense, then, to focus our stock search on the best businesses, the ones that generate the highest rates of return.

Return on CAPS
With the help of our Motley Fool CAPS community, I'll try to unearth Foolishly loved companies that consistently compound wealth at exceptional clips. In addition to having trailing three-year average returns on capital (ROC) of more than 20%, these stocks have received a four- or five-star rating (out of five) in our database:


ROC (Trailing Three-year Average)


CAPS Rating

Southern Copper (NYSE:PCU)




Graco (NYSE:GGG)


Industrial machinery


Nokia (NYSE:NOK)


Communications equipment


Hansen Natural (NASDAQ:HANS)






Data processing




Consumer electronics


MEMC Electronic Materials (NYSE:WFR)


Semiconductor equipment


Data from Capital IQ, a division of Standard & Poor's, and Motley Fool CAPS.

Of course, don't hurry out and buy these stocks just yet. You'll need to apply some Foolish due diligence of your own, considering things like valuation, quality of management, and whether a company's competitive advantages are durable enough so that it can continue to post remarkable returns.

With all that said, Graco is a good place to start.

Fun with fluids
Great growth stories are exciting, but for most value investors, nothing beats a boring, remarkably consistent, cash-generating business selling at an attractive price. Judging by the support from our CAPS community, Graco may fit that description perfectly. So far, 97% of the players who've rated the stock like it to outperform the S&P.

For the uninitiated, Graco provides a range of products like spray guns and sealants designed to make working with sticky fluids a whole lot easier. The business is as boring as they come, but Graco has dominated the space for decades, generating some of the healthiest returns on capital and cash flows around. Over the past five years, free cash flow has consistently been between 15% to 20% of sales, while Graco's dividend has compounded at a rate of 27%.

More importantly, though, Graco's competitive moat seems to be strong enough to keep those wealth-building activities going.

Head on over to Graco's CAPS page and you'll find bullish comments about the company's laser-like focus on product innovation, niche-based "high return" acquisition strategy, and even its exposure to attractive foreign markets. To be sure, Graco has been hurt by the slumping housing market, but with about 40% of the company's sales coming from Europe and Asia, management has done a nice job of offsetting the weakness here in the U.S.

With the stock trading at an enterprise value/EBITDA multiple of less than 10 and offering a decent yield of 2%, Graco is one high-return business that's at least worth investigating.

Now, let's hear directly from our CAPS community.

In May 2007, CAPS All-Star weiwentg had great things to say about Graco:

Graco has quietly dominated the world of machinery in the U.S. ... GGG is developing a number of international opportunities in emerging economies, has maintained good financials, and is generally shareholder-friendly. ... Its razor and razor blades business model is a very good one, and I think this firm has a good moat.

A more recent pitch by CAPS player timattox, in March of this year, touched on price:

This stock shows up on my "all 5-year-averages-are-fantastic" screen... which means that this is a long term company that knows how to maintain profit margins and growth at the same time (among other things). Their stock has dipped recently with the entire market, and looks like they have already started the move back up. As they expand globally, they should do very well.

The best is yet to come
Businesses that invest in products and services at high rates of return are, quite simply, the best ones to be in. By screening for stocks that have a track record of strong returns on capital, you'll be one step closer to adding that life-changing, wealth-compounding machine to your portfolio.

To gain a better feel for the ideas mentioned above, or to pan for even more highly rated, high-return businesses, join Motley Fool CAPS today. It's absolutely free -- one of the most attractive returns on capital you'll find anywhere.