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Sept. 9, 2022, 6:50 a.m. EDT

You need quality stocks during times of turmoil. Here’s one good strategy for picking them

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By Philip van Doorn

You may be aware of how difficult it is for fund mangers to outperform stock indexes. And now all investors face the challenge of a slowing economy as the Federal Reserve tightens monetary policy to cool the U.S. economy and clamp down on inflation.

Selecting individual companies for investment is difficult — you need to look back at performance but also look ahead, not only at estimates but to consider subjective factors. How likely is it that a company you are interested in will remain a top provider of goods and services in its industry? Could that industry, itself, be threatened over the long term?

What follows is a review of the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.73% to focus on one metric that is closely tied to outperformance, followed by more information about a select group of companies that might help you with your own subjective analysis.

ROIC and 10-year outperformance

A company’s return on invested capital (ROIC) is defined by FactSet as earnings divided by the sum of the carrying value of a company’s common stock, preferred stock, long-term debt and capitalized lease obligations. It is an annualized figure.

ROIC sheds light on a corporate management team’s ability to make the most efficient use of the money invested to fund its business.

The carrying value of a company’s stock may be much lower than its current market capitalization. The company may have issued most of its shares many years ago at a price much lower than today’s. If a company has issued a relatively large amount of newer shares recently, or at high prices, its ROIC will be lower.

A company with a high ROIC is likely to have a relatively low amount of long-term debt on its balance sheet, or at least to have made efficient use of the borrowed money.

Some businesses are more capital intensive than others, which means ROIC comparisons might be most meaningful within specific industries. But that is not what we are doing in this screen of stocks.

For a top-down approach, there is no need to make fair comparisons. Looking back 10 years (actually the most recent 40 quarters of data available from FactSet), ROIC data is available for 453 members of the S&P 500.

Here are the 20 companies in the S&P 500 that have achieved the highest average ROIC over the past 10 years:

Company Ticker Industry Average ROIC — past 40 quarters Total return — 10 years
VeriSign Inc. /zigman2/quotes/205260150/composite VRSN Internet Software/ Services 270.1% 282%
HP Inc. /zigman2/quotes/203461582/composite HPQ Computer Processing Hardware 69.2% 398%
Domino’s Pizza Inc. /zigman2/quotes/201587798/composite DPZ Restaurants 64.4% 1,058%
Philip Morris International Inc. /zigman2/quotes/201611010/composite PM Tobacco 51.4% 75%
Accenture PLC Class A /zigman2/quotes/201711136/composite ACN Information Technology Services 46.3% 466%
Mastercard Inc. Class A /zigman2/quotes/207581792/composite MA Misc. Commercial Services 44.8% 713%
Idexx Laboratories Inc. /zigman2/quotes/205324043/composite IDXX Medical Specialties 42.9% 631%
AutoZone Inc. /zigman2/quotes/209114484/composite AZO Specialty Stores 41.3% 486%
S&P Global Inc. /zigman2/quotes/208931849/composite SPGI Financial Publishing/ Services 38.0% 711%
Paychex Inc. /zigman2/quotes/202030365/composite PAYX Data Processing Services 37.1% 410%
Cboe Global Markets Inc. /zigman2/quotes/208166986/composite CBOE Investment Banks/ Brokers 36.6% 394%
Yum Brands Inc. /zigman2/quotes/209029767/composite YUM Restaurants 35.6% 194%
Marriott International Inc. Class A /zigman2/quotes/200170042/composite MAR Hotels/ Resorts/ Cruiselines 34.1% 354%
Intuit Inc. /zigman2/quotes/203136605/composite INTU Software 33.5% 709%
Colgate-Palmolive Co. /zigman2/quotes/200774077/composite CL Household/ Personal Care 32.9% 85%
Ross Stores Inc. /zigman2/quotes/202639496/composite ROST Apparel/ Footwear Retail 32.8% 174%
Apple Inc. /zigman2/quotes/202934861/composite AAPL Telecommunications Equipment 32.6% 672%
Robert Half International Inc. /zigman2/quotes/209666445/composite RHI Personnel Services 32.0% 253%
Lockheed Martin Corp. /zigman2/quotes/200691238/composite LMT Aerospace & Defense 32.0% 520%
FactSet Research Systems Inc. /zigman2/quotes/204586719/composite FDS Data Processing Services 31.4% 425%
Source: FactSet

Click on the tickers for more about each company. Then, as part of your own analysis, read Tomi Kilgore’s detailed guide to the wealth of information available for free on MarketWatch quote pages.

Note that FactSet Research Systems Inc. /zigman2/quotes/204586719/composite FDS -0.35% , which provided the data for this article, ranks 20th on the list.

The table includes 10-year total returns for the stocks, with dividends reinvested. Of the 20 companies, all but four have beaten the S&P 500’s 10-year return of 242% through Aug. 31.

Looking ahead: expected increases in sales and earnings

The lookback at ROIC for such a long period sheds light on how important it can be to remain committed for years. If we look ahead, estimates generally go out only two or three years. For this group, let’s look at estimated compound annual growth rates (CAGR) for the net two calendar years for revenue and for earnings per share. Many companies have fiscal years that don’t match the calendar, but FactSet provides calendar-year estimates.

/zigman2/quotes/210599714/realtime
US : S&P US
3,934.38
-29.13 -0.73%
Volume: 0.00
Dec. 9, 2022 5:18p
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/zigman2/quotes/205260150/composite
US : U.S.: Nasdaq
$ 197.67
+0.27 +0.14%
Volume: 470,922
Dec. 9, 2022 4:00p
P/E Ratio
26.29
Dividend Yield
N/A
Market Cap
$20.93 billion
Rev. per Employee
$1.54M
loading...
/zigman2/quotes/203461582/composite
US : U.S.: NYSE
$ 28.21
-0.27 -0.95%
Volume: 5.43M
Dec. 9, 2022 4:04p
P/E Ratio
9.36
Dividend Yield
3.72%
Market Cap
$27.97 billion
Rev. per Employee
$1.07M
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/zigman2/quotes/201587798/composite
US : U.S.: NYSE
$ 362.65
-12.29 -3.28%
Volume: 562,352
Dec. 9, 2022 4:00p
P/E Ratio
29.36
Dividend Yield
1.21%
Market Cap
$13.27 billion
Rev. per Employee
$332,455
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/zigman2/quotes/201611010/composite
US : U.S.: NYSE
$ 102.09
+0.03 +0.03%
Volume: 5.72M
Dec. 9, 2022 4:00p
P/E Ratio
18.18
Dividend Yield
4.98%
Market Cap
$158.21 billion
Rev. per Employee
$453,075
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/zigman2/quotes/201711136/composite
US : U.S.: NYSE
$ 288.41
-3.74 -1.28%
Volume: 1.83M
Dec. 9, 2022 4:00p
P/E Ratio
26.93
Dividend Yield
1.55%
Market Cap
$194.22 billion
Rev. per Employee
$85,429
loading...
/zigman2/quotes/207581792/composite
US : U.S.: NYSE
$ 348.83
-2.34 -0.67%
Volume: 2.30M
Dec. 9, 2022 4:00p
P/E Ratio
34.83
Dividend Yield
0.65%
Market Cap
$337.64 billion
Rev. per Employee
$900,833
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/zigman2/quotes/205324043/composite
US : U.S.: Nasdaq
$ 420.63
-7.91 -1.85%
Volume: 300,282
Dec. 9, 2022 4:00p
P/E Ratio
53.50
Dividend Yield
N/A
Market Cap
$35.49 billion
Rev. per Employee
$322,690
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/zigman2/quotes/209114484/composite
US : U.S.: NYSE
$ 2,454.99
-33.91 -1.36%
Volume: 124,650
Dec. 9, 2022 4:00p
P/E Ratio
20.58
Dividend Yield
N/A
Market Cap
$47.24 billion
Rev. per Employee
$147,932
loading...
/zigman2/quotes/208931849/composite
US : U.S.: NYSE
$ 346.75
-6.06 -1.72%
Volume: 1.50M
Dec. 9, 2022 4:00p
P/E Ratio
28.99
Dividend Yield
0.98%
Market Cap
$114.95 billion
Rev. per Employee
$452,123
loading...
/zigman2/quotes/202030365/composite
US : U.S.: Nasdaq
$ 119.51
-0.65 -0.54%
Volume: 1.56M
Dec. 9, 2022 4:00p
P/E Ratio
30.16
Dividend Yield
2.64%
Market Cap
$43.31 billion
Rev. per Employee
$295,937
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/zigman2/quotes/208166986/composite
US : U.S.: Cboe BZX
$ 124.39
-2.43 -1.92%
Volume: 792,380
Dec. 9, 2022 4:00p
P/E Ratio
55.62
Dividend Yield
1.61%
Market Cap
$13.45 billion
Rev. per Employee
$3.19M
loading...
/zigman2/quotes/209029767/composite
US : U.S.: NYSE
$ 127.71
-2.14 -1.65%
Volume: 1.83M
Dec. 9, 2022 4:03p
P/E Ratio
33.55
Dividend Yield
1.79%
Market Cap
$36.58 billion
Rev. per Employee
$186,472
loading...
/zigman2/quotes/200170042/composite
US : U.S.: Nasdaq
$ 161.16
+0.50 +0.31%
Volume: 1.26M
Dec. 9, 2022 4:00p
P/E Ratio
24.59
Dividend Yield
0.99%
Market Cap
$50.86 billion
Rev. per Employee
$160,800
loading...
/zigman2/quotes/203136605/composite
US : U.S.: Nasdaq
$ 399.83
-5.53 -1.36%
Volume: 1.06M
Dec. 9, 2022 4:00p
P/E Ratio
60.92
Dividend Yield
0.78%
Market Cap
$113.88 billion
Rev. per Employee
$769,711
loading...
/zigman2/quotes/200774077/composite
US : U.S.: NYSE
$ 77.78
-0.36 -0.46%
Volume: 2.52M
Dec. 9, 2022 4:00p
P/E Ratio
33.92
Dividend Yield
2.42%
Market Cap
$65.26 billion
Rev. per Employee
$524,882
loading...
/zigman2/quotes/202639496/composite
US : U.S.: Nasdaq
$ 114.89
-2.25 -1.92%
Volume: 2.04M
Dec. 9, 2022 4:00p
P/E Ratio
27.88
Dividend Yield
1.08%
Market Cap
$40.34 billion
Rev. per Employee
$185,022
loading...
/zigman2/quotes/202934861/composite
US : U.S.: Nasdaq
$ 142.16
-0.49 -0.34%
Volume: 76.02M
Dec. 9, 2022 4:00p
P/E Ratio
23.30
Dividend Yield
0.65%
Market Cap
$2269.29 billion
Rev. per Employee
$2.40M
loading...
/zigman2/quotes/209666445/composite
US : U.S.: NYSE
$ 73.01
0.00 0.00%
Volume: 521,527
Dec. 9, 2022 4:03p
P/E Ratio
11.84
Dividend Yield
2.36%
Market Cap
$7.92 billion
Rev. per Employee
$38,001
loading...
/zigman2/quotes/200691238/composite
US : U.S.: NYSE
$ 483.58
-1.80 -0.37%
Volume: 856,425
Dec. 9, 2022 4:03p
P/E Ratio
22.21
Dividend Yield
2.48%
Market Cap
$127.21 billion
Rev. per Employee
$567,737
loading...
/zigman2/quotes/204586719/composite
US : U.S.: NYSE
$ 449.74
-1.56 -0.35%
Volume: 163,858
Dec. 9, 2022 4:00p
P/E Ratio
43.89
Dividend Yield
0.79%
Market Cap
$17.19 billion
Rev. per Employee
$164,589
loading...
/zigman2/quotes/204586719/composite
US : U.S.: NYSE
$ 449.74
-1.56 -0.35%
Volume: 163,858
Dec. 9, 2022 4:00p
P/E Ratio
43.89
Dividend Yield
0.79%
Market Cap
$17.19 billion
Rev. per Employee
$164,589
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