The legendary performance of racehorse Secretariat in 1973 is a strong demonstration that winners tend to keep winning. Now ranked number 35 by ESPN on the list of the 20th century’s top athletes, the “Big Red” accomplished nine wins in 12 races that year, including the first Triple Crown since World War II, making the season the single richest in the history of the horse race to that point.
At Urbem, we believe that the phenomenon of Secretariat is highly applicable to the competitive business world. This is why when picking stocks, we incline ourselves to avoid turnaround stories and instead focus on companies that have already excelled. This is the advantageous leverage for long-term investors in our view – it is never necessary (nor is it easy) to project the next rising star.
Certainly, everyone may have different interpretations of “winning” when it comes to analyzing a business. For us, the most important metric is the return on capital, which happens to be how Warren Buffett (Trades, Portfolio) primarily evaluates the management’s performance and is less prone to decay over time than other key performance indicators like growth rate, according to many studies.
To give some examples, we used data from GuruFocus and dug out a couple of names that delivered at least a 15% return on tangible assets each year for the past two decades. It is evident that these are the companies that have won the competitions and thrived for long.
California-based WD-40 Co. manufactures household and multi-use products, including its signature brand WD-40, with a global presence in over 176 countries.
As described below, the business generated an annual return on tangible assets between 20% and 35% for the last two decades.
New York-based Colgate-Palmolive Co. is a multinational consumer products company specialized in the various health care, personal care and veterinary categories. The company owns the century-old oral care brand, Colgate, whose products are sold in 200 markets worldwide and account for nearly 50% of the company’s total revenue.
Colgate-Palmolive delivered an annual return on tangible assets between 15% and 30% since 2000 (see below).
Connecticut-based FactSet Research Systems Inc. provides financial information and analytic software for investment professionals, including analysts, portfolio managers and investment bankers, at financial institutions worldwide.
For the past two decades, the business earned an annual return on tangible assets of above 20% every year (see below).
Pennsylvania-based Federated Hermes Inc. is a pure-play asset management company with a specialization in the money market (approximately 69% of total assets under management at the end of fiscal 2019).
As you can see below, the company generated an annual return of at least 25% on tangible assets every single year of the last two decades.
Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We own shares of FactSet Research Systems.
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- Urbem's 'Megatrend' Series: The Rise of China
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