If you’re looking for your stocks to outperform the S&P 500, one place where you ought to start is by assessing a company’s return on invested capital. ROIC stocks, according to a recent analysis by MarketWatch, care companies with high ROIC over the past 20 years.
These ROIC stocks have tended to outperform the index over the same period.
For example, the index’s average annual return over the past 20 years was 9.8%. The best performers over this period were Apple (NASDAQ:AAPL) and Monster Beverage (NASDAQ:MNST), up 37.1% and 36.7% annually. Not coincidentally, their 20-year average ROIC was 33.0% and 32.5%, respectively.
For those unfamiliar, ROIC is defined as a company’s NOPAT (net operating profit after tax) divided by invested capital, which is the company’s debt and equity. The easiest way to calculate invested capital is to add net working capital (current assets less current liabilities), PP&E (property, plant, and equipment), and goodwill and intangibles.
Using Monster Beverage as an example, Morningstar.com’s ROIC number for the trailing 12 months is 21.3%, less than its five-year average of 25.1%, but still very high.
My task is to find three S&P 500 stocks with ROIC percentages higher than Monster.
Booking Holdings (BKNG)
First up is Booking Holdings (NASDAQ:BKNG), the online travel agency with an ROIC of 39.04%, more than double its five-year average. Its shares are up 53% over the past year and 94% over the past five years.
On Feb. 20, Seaport Research Partners analyst Aaron Kessler initiated coverage of the travel stock with a Buy rating and a $4,380 target price, about 18% above where it’s currently trading. As Barron’s pointed out, its stock performed 3x better than the index in 2023. BKNG is 165 basis points ahead of the index through Feb. 20.
“Booking Holdings is also facing a ‘more difficult’ comparison from prior years, but ‘we are positive on the [company’s] fundamentals,’ Kessler said,” Barron’s reported.
The analyst projects bookings growth of 10% in 2024 and 9% in 2025. While those are well below the 24% growth in 2023, they’re still relatively healthy after two record years for travel.
Its enterprise value is $130.1 billion, or 17.7x EBIT (earnings before interest and taxes). That’s less than half its five-year average. Its net debt is just $398 million, or 0.3% of its market cap.
NVR (NVR)
Next up is NVR (NYSE:NVR), the Virginia-based homebuilder with an ROIC of 35.75%, 390 basis points higher than its five-year average. Its shares are up 48% over the past year and 177% over the past five years.
Are NVR shares cheap right now?
The company thinks so. On Feb. 14, NVR announced a $750 million share repurchase program with no expiration date. The buyback excludes purchases from company insiders and the Profit Sharing/401(k) Plan Trust or the Employee Stock Ownership Plan Trust. This provides shareholders with assurance that no favoritism is played in the process.
The company reported its Q4 2023 results at the end of January. It made $454.3 million in homebuilding income from $2.39 billion in revenue. Its mortgage banking unit’s income was $29.7 million. Unfortunately, while mortgage banking revenue was up year-over-year, its homebuilding revenues declined by 10.5% over Q4 2022.
The builder finished 2023 with 10,229 units sold but not settled, representing $4.76 billion in revenue once completed, with cancellation rates around 13%, lower than 14% in 2022 but higher than 9% in 2021. It’s a part of the industry.
Its enterprise value is $21.5 billion, or 11.0x EBIT. That’s a fraction higher than its five-year average. At the end of December, its net cash was $2.1 billion, or 9% of its market cap.
EOG Resources (EOG)
The last choice is EOG Resources (NYSE:EOG), the Houston oil and gas company that used to be Enron Oil and Gas until Enron Corp. spun it off in 1999, two years before the energy trading company entered bankruptcy proceedings in December 2001.
Today, EOG has an ROIC of 26.22%, nearly double its five-year average. Its shares are down 5% over the past year and up 18% over the past five years.
Earlier in February, I recommended EOG stock and two other oil and gas businesses that had started slowly in 2024 but were showing signs of life. Analysts expect it to generate nearly $24 billion in revenue in 2024, with earnings per share of $11.73. It currently trades at 9.7x this estimate, a very reasonable valuation.
As I said in my article, 35 analysts cover its stock, with 22 rating it Buy, with a $139.63 target price, 26% higher than where it’s currently trading.
Its enterprise value is $65.04 billion, or 6.4x EBIT. That’s less than one-third of its five-year average. At the end of September, its net cash was $1.2 billion, or 2% of its market cap.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
