The famous investing disclaimer states that "past performance is not necessarily indicative of future results."
But all else equal, I'll take my chances with the companies that have historically made profits, versus those that have historically made excuses.
Paying a massive premium for this past performance is where the game can get dangerous. So you can call me greedy, but I want these proven winners at reasonable-to-dirt-cheap prices.
Think I'm being too picky? Hold your judgments. I've found nine examples of exactly these kinds of stocks.
How I found them
Remember that I promised stocks that not only have proven track records but are also cheap. By "cheap," I mean a stock that is selling for a low multiple on earnings when compared with its growth prospects.
Of course, cheapness doesn't matter if you can't trust the earnings or the growth estimates.
This is where a proven track record comes back in. For track record purposes, I looked for companies that have been growing for a decade or more efficiently and profitably.
To find all of these factors, I screened for the following:
- 10-year average return on capital greater than 10%.
- 10-year compounded earnings-per-share growth rate greater than 10%.
- Price-to-earnings ratio below 20 (20 is my upper limit for cheap on a grower).
- Future expected growth rate expected greater than 5%.
Here are nine intriguing companies that had all four criteria:
10-Year Return on Capital
10-Year EPS Growth Rate
Projected Long-Term EPS Growth Rate
Source: Capital IQ, a division of Standard & Poor's.
These companies have achieved a lot in the past 10 years, especially in the face of two collapsing bubbles -- the dot-com bubble at the beginning of the decade and the housing bubble at the end.
Their profitable growth records allowed them to make the cut while formidable companies such as Procter & Gamble and Disney fell one metric short. That said, you'll short-change yourself if you go purely off the numbers and do no further research.
You need to ask yourself these three follow-up questions:
- Are the current earnings a true representation of the company's current state? Watch out for one-time items, industry shifts, management changes, and so on.
- What future growth can I reasonably assume? Past growth figures and analyst estimates have a way of overstating future prospects.
- Is the company likely to use capital in the future as efficiently as in the past? Watch out for empire-building, high-cost/low-upside bets, and new, unrelated business lines.
Digging in to find the answers to these questions will help you fill in the story behind the numbers. Let me get you started.
2 stocks whose back stories check out
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This article was first published April 23, 2010, as "7 Cheap Stocks With Proven Track Records." It has been updated.
Anand Chokkavelu owns shares of ExxonMobil and Disney. He prefers it when people use the words "proven track record" vs. "cheap" when introducing him. Walt Disney and UnitedHealth Group are recommendations of Motley Fool Inside Value and Motley Fool Stock Advisor. PepsiCo and Procter & Gamble are Motley Fool Income Investor choices. The Fool owns shares of and has written covered calls on Procter & Gamble. Motley Fool Options has recommended a diagonal call position on PepsiCo and a diagonal call position on UnitedHealth Group. The Fool owns shares of ExxonMobil, Medtronic, and UnitedHealth Group. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.