Investing and trading are not the same thing. Much of the financial media coverage of the stock market is geared toward the short-term concerns of traders trying to buy or sell at the best prices. But long-term investors who pick individual stocks need to consider the quality of the companies they own.
A long-term investment approach can take many years to pay off. SPDR S&P 500 ETF Trust SPY,
For example, it returned 26.2% in 2023, with dividends reinvested. But that came after an 18.2% decline in 2022. As of Friday, the fund had returned 4.8% since the end of 2021. But over the past 10 years, SPY has returned 215%, for a compound annual return of 12.3%, according to FactSet. . .
So the index has an excellent long-term track record for patient investors. But what about individual stocks? Last week, Mark Phillips, of Ned Davis Research, published a list of 31 “great European companies at a fair price,” based on the company’s analysis of asset returns over a decade and other factors.
This list was all based on historical data, so we narrowed it down to 10 stocks by looking at expected increases in earnings per share through 2025.
Why not apply the NDR approach to the S&P 500 SPX?
Screen S&P 500 stocks for quality long-term and reasonable current prices
To apply the NDR methodology to expose European stocks to the US market, we started with the S&P 500 and looked at 10 years of returns on assets, according to FactSet calculations. Here's how to narrow down the list:
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468 companies in the S&P 500 have a 10-year earnings history during their most recently reported fiscal quarter.
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262 companies achieved a 10-year average return on assets of at least 5%. FactSet calculates current ROA by looking at the last four quarters of net income, adjusting to remove gains or losses from discontinued operations, and dividing that amount by total assets. We're in the middle of earnings season, so for a company that recently reported earnings as of September 30, the most recent ROA is for the four quarters to that date. The previous year would be up to September 30, 2022, and so on. The average return on assets is therefore for each 10 quarterly periods reported for each company. For comparison, the S&P 500 had an estimated ROI of 3.99% for 2023, based on aggregate-weighted estimates among analysts surveyed by FactSet, with an average 10-year ROI of 3.48%.
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Also, 216 companies had a return on assets above zero for all four-quarter periods.
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Also, 123 companies achieved a two-year average ROA higher than the 10-year average ROA.
The final part of the historical screen was to look at companies' earnings yields over the past 12-month periods. A company's dividend yield is its trailing earnings per share divided by the current stock price. For the S&P 500, the earnings-weighted yield as of Friday's close was 4.13%.
This is the part of the screen that was intended to isolate companies that trade “at a fair price,” according to Phillips, who wrote that “since better quality companies tend to have higher ratings than lower quality companies, rather than simply screening on the raw,” . Dividend Yield We divided the dividend yield by the market average dividend yield and compared it to the three-year average.
For each of the remaining 123 companies, we calculated the relative dividend yields for each of the previous 12-month periods by dividing the dividend yields by the average dividend yields among S&P 500 companies. It turns out that 55 companies are included in the index The S&P 500 has recently had relative dividend yields higher than its three-year averages.
The Final Cut – Looking Ahead
To narrow down the list further, we looked at consensus earnings estimates for calendar years through 2025 among analysts surveyed by FactSet. Here are the 20 companies that passed the historical screens above and also show the highest projected EPS CAGRs through 2025:
| a company | tape | Two-year average return on assets | 10 year average return on assets | Dividend yield, last 12 months reported | Estimated two-year CAGR through 2025 | Total return for 10 years |
|
Nvidia company |
ran out, |
27.30% |
21.21% |
1.87% |
43.8% |
15672% |
|
Chipotle Mexican Grill Company |
cmg, |
13.96% |
10.98% |
2.30% |
20.8% |
342% |
|
Booking Holding Company |
Baking, |
16.49% |
13.15% |
4.66% |
19.3% |
207% |
|
Harmonious Energy Systems Company |
Mabour, |
21.97% |
14.06% |
2.00% |
15.4% |
1916% |
|
MSCI Class A Company |
MSCI, |
18.52% |
12.60% |
2.34% |
13.5% |
1286% |
|
IDEX Laboratories Company |
IDXX, |
27.69% |
22.23% |
2.24% |
13.5% |
822% |
|
Visa company class A |
Fifth, |
18.34% |
14.76% |
3.54% |
13.3% |
400% |
|
Waste management company |
Wm, |
7.57% |
6.26% |
3.71% |
12.7% |
433% |
|
Martin Marietta Materials Company |
MLM, |
6.60% |
5.76% |
4.20% |
12.7% |
411% |
|
Rollins Company |
Role, |
17.38% |
17.28% |
2.23% |
12.4% |
484% |
|
Arista Networks |
network, |
22.52% |
16.73% |
3.27% |
12.2% |
nothing |
|
Marriott International Class A |
March, |
10.18% |
7.08% |
4.80% |
11.9% |
410% |
|
UnitedHealth Group |
United nations, |
8.59% |
7.68% |
4.53% |
11.7% |
709% |
|
Train Technologies plc |
TT, |
10.03% |
6.95% |
4.18% |
11.6% |
516% |
|
Zoetis Class A company |
zts, |
15.76% |
12.06% |
2.83% |
11.6% |
539% |
|
ResMed Company |
arrhythmia, |
15.54% |
13.21% |
4.16% |
11.4% |
335% |
|
Fortinet Corporation |
Fascinated |
15.55% |
8.05% |
2.47% |
11.2% |
1318% |
|
Aoun PLC Class A |
On, |
8.67% |
5.21% |
4.06% |
11.0% |
309% |
|
Edwards Life Sciences Corporation |
electronic warfare, |
16.63% |
15.87% |
3.38% |
10.9% |
551% |
|
Biotechnology company |
Technique, |
11.15% |
8.96% |
2.24% |
10.5% |
220% |
|
Source: Factset |
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If you are selecting individual stocks rather than taking a broad, low-risk approach with index funds or actively managed funds, it is important to form your own opinion about the company's ability to remain competitive in providing goods or services over the long term. One way to start your search is to click on the indicators.
Click here for Tomi Kilgore's detailed guide to much of the information available for free on the MarketWatch rates page.
When describing his screen of European companies, Phillips wrote that companies that passed the screen tended to outperform the stock market as a whole. The same is true for the S&P 500 screen. Of the 20 companies in the table, 20 had 10-year total returns that exceeded the index's 10-year return by 218% through Friday.
NVDA,
It tops the list with the highest projected CAGR for the stock through 2025. But it's also the most expensive stock on the list by screening criteria, because it has the lowest dividend yield. Rapid growth commands a premium, and Nvidia has also been a consistent ROI performer.
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