The Best Stock of the Last 20 Years
After 20 years, I've learned the one trait that all great investments share... How to manage risk over the long term... The best stock of the last 20 years... Happy birthday, Dad...
Editor's note: The market will be closed for Labor Day, so we won't publish the Digest on Monday. Enjoy the holiday.
Twenty years ago, I (Porter) began writing about stocks and investing. After doing something for 20 years, you learn the hard way that much of what you thought was true isn't... But you also learn what really works, time and time again.
I asked my team of analysts to go back to July 1996 and figure out which companies performed the best. In other words, if, starting from my first day in this business, I had only picked the very best stocks for the next 20 years, which ones would I have recommended?
The purpose of this rear-looking examination is simply to see if I've learned anything after 20 years in this business. Did I eventually learn to find these "truffles," or am I still just a pig sniffing in the woods?
Looking at the top 100 best-performing stocks over the last 20 years, I'm happy to say that we've written about many of them – and more from the top 50 than the second 50. The top-performing company, NVR (NVR), is a homebuilder I've highlighted many times as being the only company in the sector you should ever own. It's one of the best examples of capital efficiency in the stock market.
Back in 2007, I predicted it would easily survive the housing crisis and recommended buying it below $400 per share (now it's trading above $1,600). Dan Ferris and I have written about a lot of these great companies over the years: Apple (AAPL), Biogen (BIIB), Ross Stores (ROST), Constellation Brands (STZ), Starbucks (SBUX), Core Laboratories (CLB), National Beverage (FIZZ), Expeditors International of Washington (EXPD), Qualcomm (QCOM), RLI (RLI), Dollar Tree (DLTR), American Eagle (AEO), Adobe Systems (ADBE), Regeneron (REGN), AutoZone (AZO), Altria (MO), etc.
To make the list, a company had to produce annualized returns in excess of 15%. The top performers (NVR, Apple, and Gilead Sciences) only produced 28% a year over the period. These numbers surprised me. I bet they surprised you, too. Investors are still far too optimistic about what their average returns might be in the stock market. The 100 best-performing companies only earned around 15% a year. Only 20 stocks have earned 20% or more over the past two decades.
Therefore, it's highly unlikely that you're going to end up with an entire portfolio of stocks that all perform this well. Long-term studies of my recommended portfolios over many years show that I've averaged around 12% a year (before taxes) with my model portfolios. That's about 50% better than the S&P 500, which has produced 8% annualized gains over the last 20 years. But even relatively small improvements matter a lot over the long term. Twenty years ago, if you had invested $50,000 in the S&P 500, your account would be worth almost $250,000 today. If you had invested in my model portfolios, the account would be worth more than $487,000.
Thus... improving your long-term results is probably the most important thing you can do to increase the quality of your retirement, outside of simply saving a lot more money. How can you do a better job with your long-term investments?
Looking at the list, a few things immediately jump out. Virtually every one of the companies is exceptionally "capital efficient," meaning it didn't require much capital to grow its sales or profits.
The best example of this is the No. 1 stock on the list, NVR. If you had bought NVR in July 1996, you would have made a 15,592% return – or 28.6% annually. The amazing thing is that you would have made more money than the big Internet stocks, like Yahoo (YHOO). You would have made more money than all of the risky, volatile biotech stocks. And you would have blown away the performance of even the best tech companies, like Qualcomm – stocks that are far more famous for delivering big returns.
Plus, you would have done so in a business (homebuilding) that is easy to understand and produces consistent growth and profits. In other words, owning NVR wouldn't have just been more profitable, it would have been a lot less stressful than owning any of these other high-performing companies. I'd urge you go back and read my original write-up of NVR. You'll find it in the November 2007 issue of my Investment Advisory. As you'll see, NVR is the only capital-efficient homebuilder. For wise investors, this company wasn't a needle in a haystack... It was the only haystack in the barnyard.
The other quality that immediately jumps out when looking at this list is that these are all businesses with high operating margins. You're not going to do well over 20 years by owning a beaten-down horse – no matter how little you paid for it or how good the jockey is. Keep that in mind the next time you're tempted to buy something in the gutter just because it's really cheap.
Another obvious quality: These stocks all had a lot of room to grow. Only one of the companies out of the top 100 had a market capitalization of more than $10 billion (tobacco giant Altria). But 72 of them had market caps of less than $1 billion. It can really pay off if you spend time looking around for high-quality, small businesses that most investors aren't following yet.
Finally... the most obvious qualities... these stocks, almost without exception, were not expensive back in 1996. Half of the list was trading at a price-to-sales valuation of less than 1 – meaning they were trading for less than one year's worth of sales. (On average, the price-to-sale valuation was 1.) And these companies were growing. Only Altria didn't produce substantial sales growth on an annualized basis for the last 20 years – virtually all of these firms produced double-digit annual sales growth for 20 years! (We've compiled the full list right here.)
So there you have it. If you want to improve your long-term results (which are the most tax-efficient), try looking for smaller businesses (less than $1 billion in market cap) that are capital efficient, have a good business (operating margins above 15%), and that you believe can grow a lot over many years.
One of the things I liked best about doing this study and looking at these companies is the realization that there are great stocks available for all types of investors. The guy who is comfortable owning Tractor Supply (TSCO) for 20 years might not feel comfortable buying Biogen. And that's fine, because you can still make a fortune in Tractor Supply and businesses like it.
You just have to be willing to look.
One more thing. I anticipate some subscribers will recognize that it's virtually impossible to achieve results like the kind in the list below if you're using trailing stops. Sooner or later, a major bear market will probably cause you stop out of even your best investments.
How can you find a way to stay in great investments like these without abandoning your risk-management practices? Two ways. First, if you're careful about adjusting your trailing stops for the income you've gotten in dividends, you will usually find that you can hang on to your high-quality, long-term investments.
If your timing is bad, you might not have enough dividend income to cover the risk, in which case I would recommend selling down to a level that represents "no risk" to your portfolio as a whole. For example, you don't have to worry about a 2% position the way you should watch a 5% position. And even a 2% position in a stock like NVR, held for 20 years, is going to make a huge difference in your retirement.
One last thing... a personal note.
Today is my dad's 76th birthday. The bond between a loving father and his son is... well... there's no way to explain it unless you've had a dad like mine. My dad loves me on my best days with a quiet pride. "I knew you could do it son," he whispers. "Never had a doubt."
He stands behind me on my worst days, too. "Son, I know you know better than that. But I'm sure you've learned something."
Dad is always in my corner, even when I'm flat wrong. "Son... you might change your mind about that, so leave yourself some room to maneuver. And remember, you can always tell them to go to hell tomorrow."
No matter what, my dad is always encouraging. And because of his faith and love, I always thought I could do anything if I put my mind to it. What a difference that made in my life. Dad, I love you. And I miss you all the time. Thanks so much for adopting me 40 years ago. Happy 76th birthday! And like you always say, "Don't forget: The best is yet to come."
New 52-week highs (as of 9/1/16): CME Group (CME), Western Asset Emerging Markets Debt Fund (ESD), KraneShares CSI China Internet Fund (KWEB), and Procter & Gamble (PG).
The mailbag has been awfully quiet lately. Are you enjoying the last days of summer? Let us know what's on your mind. Drop us a line at feedback@stansberryresearch.com.
Good investing,
Porter Stansberry
Baltimore, Maryland
September 2, 2016
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