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3 Great Compounder Stocks to Buy for Strong Returns in All Environments
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Today’s macroeconomic and geopolitical environment feels particularly uncertain. Owning stocks with robust business models that generate strong returns, with minimal cyclicality are one safe place to invest in 2023.
Compounder stocks are companies that can deliver sustainable long-term growth across different types of economic environments. Three that look like they have near term bullish catalysts will be covered below.
What is a Compounder Stock?
A compounder stock is a company with high return on invested capital, a robust franchise, recurring revenues, intangible assets, pricing power, and low capital intensity. These are companies that have exhibited exceptional long-term returns, and regularly outperform during economic downturns. They remain resilient during tough economic times because their products are necessities, with wide margins, and very regular purchases or usage.
The chart below shows the ten-year returns of a few well-known compounders and demonstrates the kind of performance they can produce. These include Mastercard (MA - Free Report) , Alphabet (GOOGL - Free Report) , Costco (COST - Free Report) , and United Healthcare (UNH - Free Report) .
Image Source: Zacks Investment Research
Visa
Visa (V - Free Report) is a quintessential compounder stock. Visa boasts gross margins of 99%, net margins of 50%, and functions essentially as a tax on debit or credit card purchases. Using Visa products is a non-discretionary decision, and Visa cards are sometimes used multiple times per day, whether it’s a recession or boom time.
Visa currently has a Zacks Rank #2 (Buy), indicating strong earnings revisions trends. V is also in the lower range of its historical valuation. With a one-year forward P/E of 26x it is well off its 10-year high of 38x, and right in line with its historical median of 26x.
Image Source: Zacks Investment Research
MSCI
Data and information-based companies can make outstanding business models, and (MSCI - Free Report) is one of the best. Similar to S&P Global and Moody’s Co (MCO - Free Report) , two fellow compounders, financial data and indexing is a category of business that is above the rest.
Financial professionals will never stop needing data to do their jobs, and they need that data updated daily, if not more frequently. Financial firms also tend to make a lot of money, so spending on data is never a question for them. Even better for MSCI is that the need for accurate and abundant data is only growing. Increasingly specific, and granular data is required for good financial and investment research.
MSCI also enjoys a Zacks Rank #2 (Buy). All timeframes, including current quarter, current year, next quarter and next year have experienced consistent revisions higher in earnings over the last 90 days.
Image Source: Zacks Investment Research
KO
Coca-Cola (KO - Free Report) is kind of a sleeper compounder, but still a great one. Many people think that KO is a beverage company, but really Coca-Cola is more than that. KO is an intellectual property, licensing, and marketing company.
The majority of Coca-Cola production is actually outsourced to other beverage producers. Another fun fact is that the majority of KO’s profits actually come from selling the syrup, rather than cans or bottles of its famous beverages.
KO currently sports a Zacks Rank #2 (Buy) and offers a handsome dividend yield of 3%.
Coca-Cola stock also proved its resiliency over the last year, well outperforming the broad market, and posting positive returns during one of the most challenging years in stock market history.
Image Source: Zacks Investment Research
Bottom Line
Compounder stocks can sometimes be difficult to pull the trigger on. Not because they aren’t clearly good businesses, but because they can appear to be too expensive. And that is a reasonable concern, nobody wants to overpay. But because these are such premium stocks, that can often carry premium valuations.
Periods of extended selloffs, or full-on bear markets like we have been experiencing recently can be amazing opportunities to buy shares in these high return stocks. Furthermore, in economic environments of slowing growth, and decreasing liquidity, these stocks can fundamentally protect portfolios.
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3 Great Compounder Stocks to Buy for Strong Returns in All Environments
Today’s macroeconomic and geopolitical environment feels particularly uncertain. Owning stocks with robust business models that generate strong returns, with minimal cyclicality are one safe place to invest in 2023.
Compounder stocks are companies that can deliver sustainable long-term growth across different types of economic environments. Three that look like they have near term bullish catalysts will be covered below.
What is a Compounder Stock?
A compounder stock is a company with high return on invested capital, a robust franchise, recurring revenues, intangible assets, pricing power, and low capital intensity. These are companies that have exhibited exceptional long-term returns, and regularly outperform during economic downturns. They remain resilient during tough economic times because their products are necessities, with wide margins, and very regular purchases or usage.
The chart below shows the ten-year returns of a few well-known compounders and demonstrates the kind of performance they can produce. These include Mastercard (MA - Free Report) , Alphabet (GOOGL - Free Report) , Costco (COST - Free Report) , and United Healthcare (UNH - Free Report) .
Image Source: Zacks Investment Research
Visa
Visa (V - Free Report) is a quintessential compounder stock. Visa boasts gross margins of 99%, net margins of 50%, and functions essentially as a tax on debit or credit card purchases. Using Visa products is a non-discretionary decision, and Visa cards are sometimes used multiple times per day, whether it’s a recession or boom time.
Visa currently has a Zacks Rank #2 (Buy), indicating strong earnings revisions trends. V is also in the lower range of its historical valuation. With a one-year forward P/E of 26x it is well off its 10-year high of 38x, and right in line with its historical median of 26x.
Image Source: Zacks Investment Research
MSCI
Data and information-based companies can make outstanding business models, and (MSCI - Free Report) is one of the best. Similar to S&P Global and Moody’s Co (MCO - Free Report) , two fellow compounders, financial data and indexing is a category of business that is above the rest.
Financial professionals will never stop needing data to do their jobs, and they need that data updated daily, if not more frequently. Financial firms also tend to make a lot of money, so spending on data is never a question for them. Even better for MSCI is that the need for accurate and abundant data is only growing. Increasingly specific, and granular data is required for good financial and investment research.
MSCI also enjoys a Zacks Rank #2 (Buy). All timeframes, including current quarter, current year, next quarter and next year have experienced consistent revisions higher in earnings over the last 90 days.
Image Source: Zacks Investment Research
KO
Coca-Cola (KO - Free Report) is kind of a sleeper compounder, but still a great one. Many people think that KO is a beverage company, but really Coca-Cola is more than that. KO is an intellectual property, licensing, and marketing company.
The majority of Coca-Cola production is actually outsourced to other beverage producers. Another fun fact is that the majority of KO’s profits actually come from selling the syrup, rather than cans or bottles of its famous beverages.
KO currently sports a Zacks Rank #2 (Buy) and offers a handsome dividend yield of 3%.
Coca-Cola stock also proved its resiliency over the last year, well outperforming the broad market, and posting positive returns during one of the most challenging years in stock market history.
Image Source: Zacks Investment Research
Bottom Line
Compounder stocks can sometimes be difficult to pull the trigger on. Not because they aren’t clearly good businesses, but because they can appear to be too expensive. And that is a reasonable concern, nobody wants to overpay. But because these are such premium stocks, that can often carry premium valuations.
Periods of extended selloffs, or full-on bear markets like we have been experiencing recently can be amazing opportunities to buy shares in these high return stocks. Furthermore, in economic environments of slowing growth, and decreasing liquidity, these stocks can fundamentally protect portfolios.