Wal-Mart is the No. 1 retailer in the world. In 1972, it was breaking the rules of the American marketplace. I've been studying the company's archived annual reports because they offer a blueprint of a small company on the verge of world domination.
A brief look back
The story of Wal-Mart's rise is the stuff of legend. The cover of the company's 1972 annual report featured the locations of its 51 stores in five states: Arkansas, Louisiana, Kansas, Oklahoma, and Missouri. Today, there are 1,500 stores in eight countries. In 1972, Sam Walton wrote that there were 2,300 employees in the Wal-Mart world. Today, there are 1.6 million associates. During that time, the company has increased more than 1,000 times in value -- growing from a $195 million micro cap to a $200 billion global leader. Along the way, investors realized 23% compounded annual growth.
Impressive? Quite. Amazing? Certainly. Reproducible? Absolutely.
So, then, how could investors have known way back when that Wal-Mart was a Rule Breaking growth stock?
Clues to use
Three traits jumped out at me while flipping through the Wal-Mart annual reports:
- Based on top-line growth, the company was going nowhere but up. From 1969 to 1970, sales grew 44%. From 1970 to 1971, they grew another 44%. From 1971 to 1972, sales grew an astounding 76%. Sales were increasing and accelerating.
- Management at the young company was competent and shareholder-friendly. Return on equity (ROE) was 35% in 1971. Return on assets was 10%. The very next year, ROE was an absurd 63%. In other words, Sam Walton and his team were maximizing the business model.
- President Sam Walton had a clear and compelling vision for the future. That vision included dominant store growth in communities within 300 miles of the distribution center and an efficient business model that could maintain the lowest possible prices and margins.
Those three Rule Breaking tenets formed the basis of Wal-Mart's sustainable advantage and helped it become one of the strongest public companies in the world.
Foolish final thoughts
Accelerating sales, a sustainable advantage, and smart management are three factors the Motley Fool Rule Breakers team uses to identify tomorrow's landscape-changing companies today. They were the key to Wal-Mart's success, and they also catapulted a number of other industry-leading companies, including Ameritrade
Early investments in groundbreaking companies like these could have supercharged your portfolio. How much? Since it's not reasonable to assume you can buy every Rule Breaker at its IPO, let's assume you found these companies a full year after they came public:
|
Company |
IPO Date |
CAGR |
|---|---|---|
|
Wal-Mart |
Oct. 1, 1970 |
21% |
|
Ameritrade |
Mar. 4, 1997 |
36% |
|
Home Depot |
Sept. 23, 1981 |
24% |
|
Quest Diagnostics |
Dec. 31, 1996 |
36% |
|
Best Buy |
April 18, 1985 |
25% |
|
Urban Outfitters |
Nov. 9, 1993 |
32% |
|
Apple |
Dec. 12, 1980 |
16% |
|
Whole Foods |
Jan. 23, 1992 |
26% |
|
Average CAGR* |
27% |
A long-term 27% CAGR is incredible -- better than the return of most every master investor. That's possible for Rule Breakers, but not likely since we haven't factored in any losers -- a fact of life for Rule Breaking investors. After all, even companies with accelerating sales and smart management can fail. So let's account for four stocks that go to zero: We're still looking at a 18% CAGR. And with an 18% CAGR and a $10,000 investment, you can be a millionaire in a little more than 28 years -- even sooner if you buy to hold and regularly add money to your portfolio. That's not to say there aren't risks, of course. But the axiom of finance is: greater risk, greater reward. There is enormous profit potential in finding Rule Breakers early on -- if you can do it with any regularity.
To date, Fool co-founder David Gardner and his Rule Breakers team have found more than 25 companies that aspire to the Rule-Breaking profile of accelerating sales, sustainable advantage, and smart management, and they expect to find many more. Those current picks are up more than 15 percentage points on the S&P 500, with three having already doubled in little more than a year. If you want to take a look at the companies they've found, read their analysis, and interact with thousands of investors who are actively following these companies, take a 30-day free trial to the service. You have no obligation to subscribe.
It pays to look for companies that are poised to break the rules of mediocre business.
This article was originally published on Aug. 22, 2005. It has been updated.
Tim Hanson owns shares of Whole Foods. Best Buy and Whole Foods are Motley Fool Stock Advisor recommendations. Home Depot is a Motley Fool Inside Value recommendation. At the Fool, no writer is too cool fordisclosure... and Tim's pretty darn cool.
