Who doesn’t want to get higher returns? Some ways to boost your portfolio include buying discounted companies, high-growth companies, and small companies, and two other strategies.
Buy discounted companies
If two companies have similar growth prospects and fundamentals, the one that’s trading at a cheaper multiple will deliver higher long-term returns.
It’s even more powerful if you buy discounted, high-quality companies. In 2013 the AAA S&P credit rating tech giant Microsoft Corporation (NASDAQ: MSFT) traded at a multiple of 12 at under $32 per share. Since then, it has returned 74.9% or an annualized return of 21.9% as its multiple expanded to 19.4.
A $10,000 investment would have turned into $17,490 in less than three years.
Today, I find Apple Inc. (NASDAQ: AAPL) to be a quality company that’s discounted. The AA+ S&P credit rating tech giant is trading at a multiple of 11.7.
Interestingly, when comparing its performance with Microsoft in the same period, Apple returned 62.6%, or an annualized return of 18.8%, even though it experienced little multiple expansion from 11.2. So, it’s not too shabby an investment.
Buy high-growth companies
For investors with a long investment horizon, high-growth companies can contribute greatly to their portfolios. Here’s an example with Alimentation Couche-Tard Inc. (TSX:ATD.B).
Between the fiscal years 2010 and 2016, Couche-Tard’s earnings per share grew at an average rate of 32% per year. That translated to returns of 784%, or an annualized return of 43.8%!
A $10,000 investment would have turned into $88,449 in six years!
Buy small companies
It’s easier for a company that earns $100 million of revenue to double it to $200 million than it is for a company that earns $1 billion of revenue to double it to $2 billion.
Exco Technologies Limited (TSX: XTC) doubled its revenues from $202 million in 2011 to $498 million in 2015. In the same period it returned almost 375%, or an annualized return of 36.6%.
A $10,000 investment would have turned into $47,480 in four years!
Trade less
Frequent trading can be exciting. Investors can jump in and out of stocks for quick gains, but that’s like dangerous drivers who cut into lanes at high speeds and could end up in serious accidents.
Instead, investors can buy quality stocks such as the ones listed above and hold them for a long time. Time and compounding of earnings in quality holdings will boost your portfolio’s returns.
Trading often will only cost you more in trading fees.
Buy when the general market is low
Let’s face it. No matter how well a company is doing, when some black swan event hits the market, it can tank very quickly. So, it makes sense to always have some cash on hand to be ready to buy quality companies on the cheap.
When the general market falls 15-30% from its high, it’s time to start shopping to boost your portfolio’s returns. Currently, the S&P 500 and the iShares S&P/TSX 60 Index Fund are less than 2% and 7.4%, respectively, below their 52-week highs.
So, in the macro sense, it’s not the time to buy. However, there are select companies that are attractive, including Apple and Exco Technologies.
