The famous investing disclaimer states: "Past performance is not necessarily indicative of future results."
Fair enough.
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 seven examples of exactly these kinds of stocks. Let me share them with you.
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 to 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 efficiently and profitably for a decade or more.
To find all of these factors, I screened for the following:
- 10-year average return on capital > 10%.
- 10-year compounded EPS growth rate > 10%.
- P/E ratio below 20 (20 is my upper limit for cheap on a grower).
- Future expected growth rate > 5%.
Here are seven intriguing companies that met all four criteria:
|
Company |
10-Year
|
10-Year
|
P/E Ratio |
Projected Long-Term
|
|---|---|---|---|---|
|
Sysco |
21.4% |
12.5% |
15.9 |
10.5% |
|
Johnson & Johnson |
18.2% |
12.2% |
14.9 |
7.2% |
|
BP |
13.5% |
13.0% |
11.4 |
13.3% |
|
Wal-Mart |
12.9% |
11.6% |
14.7 |
11.2% |
|
Olin |
12.1% |
16.6% |
12.5 |
17.0% |
|
Transocean |
12.0% |
29.2% |
9.2 |
18.4% |
|
Raytheon |
11.7% |
12.6% |
12.5 |
10.7% |
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; the housing bubble at the end.
Their profitable growth records allowed them to make the cut while formidable companies like IBM and Merck fell one metric short. That said, you'll shortchange yourself if you go purely off the numbers and do no further research.
You need to ask 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, etc.
- 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 backstory behind the numbers. Let me get you started.
Two stocks whose backstories check out
The analysts at our Motley Fool Inside Value investing service go a step further after they've found their answers. They use discounted cash flow models to estimate the intrinsic value of possible recommendations. Only those stocks that are selling at significant discounts to these estimates make the cut.
Of the companies I highlighted above, they like food distributor Sysco and retailer Wal-Mart. In fact, Wal-Mart is currently on their "best buys now" list. I invite you to see the entire list and all our Inside Value research by taking a free 30-day trial. Click here to start.
Anand Chokkavelu doesn't own shares in any company mentioned. He prefers when people use the words "proven track record" vs. "cheap" when introducing him. Sysco and Wal-Mart are Motley Fool Inside Value recommendations. Johnson & Johnson and Sysco are Income Investor recommendations. Motley Fool Options has recommended a buy calls position on Johnson & Johnson. The Fool owns shares of Sysco and has a disclosure policy.
