High ROIC Stocks Outperformed In 2008
David Trainer | Dec 03, 2015 12:39AM ET
What do toy company Hasbro (O:HAS), retail giant Wal-Mart (N:WMT), tax preparer H&R Block (N:HRB), auto parts store AutoZone (N:AZO), and biotech companies Gilead (GILD), Amgen (O:AMGN), and Celgene (O:CELG) all have in common?
They are the only surviving S&P 500 stocks to rise 10% or more in 2008. In the midst of a collapsing market and the subsequent damage, these seven stocks made good money for investors.
What other trait do they share? They all earn a consistently high return on invested capital (ROIC ). Six out of these seven companies have earned a double digit ROIC in every year for the past decade, and the one exception, CELG, has managed it in nine out of ten.
Figure 1: S&P 500 Stocks That Made Big Money In 2008
Sources: New Constructs, LLC and company filings.
Figure 1 shows that all seven companies earned a high ROIC going into the disastrous year of 2008. CELG struggled to a 5% ROIC in 2008 before quickly rebounding, while all of the other companies continued their strong profitability even in a poor economy.
The success of these stocks can’t be credited solely to their industries either. HAS competitor Mattel (O:MAT) dropped 16% on the year. AZO competitor Pep Boys-Manny Moe & Jack (N:PBY) actually did worse than the broader market and fell over 60% in 2008.
Strong In A Bull Market Too
Not only did these stocks thrive during the market crash, they’ve done incredibly well in the recovery too. All except HRB and WMT have outperformed the S&P 500, and an equal weight bundle of these seven stocks would have returned 233% since the recovery began, 35% better than the S&P 500.
For those who wonder why we put so much work into adjusting the income statement and balance sheet to get ROIC, here is your answer. Empirical research shows that ROIC, not P/E is the most important driver of valuation. Long-term, companies that can earn superior returns on capital are the ones that outperform, regardless of the market climate.
Disclosure: David Trainer and Sam McBride receive no compensation to write about any specific stock, sector, style, or theme.
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