It is not everyone’s goal to outperform the market. Still, given the choice, I believe investors would prefer to beat the market than not. Here are a couple of questions you can ask yourself to identify outperforming stocks.
Which sectors or industries are underperforming?
Identify underperforming sectors or industries. Then buy the top companies from the sector.
Here’s an example of how this have worked beautifully for the top Canadian banks, which are the most profitable publicly traded companies in Canada.
So, never count out underperforming stocks. They can make an amazing comeback as long as the profits of their underlying businesses are still intact.
Which has higher growth?
When considering two companies in the same industry, the one with higher growth will likely outperform the one with lower growth, given that you pay a reasonable multiple for the higher-growth company.
Algonquin’s one-year returns were about 24%, of which roughly 5% came from dividends and 19% came from capital appreciation.
Although, roughly a year ago, the utility was trading at a multiple of about 21.8, it was a reasonable multiple for its earnings-per-share (EPS) growth, which was 24% in 2016.
Fortis’s one-year returns were about 18%, of which roughly 4% came from dividends and 14% came from capital appreciation.
A year ago, the utility was trading at a multiple of about 17.5, which was reasonable for its stability and expected moderate growth of 5.75-7% per year for the next few years.
Since Algonquin’s EPS is expected to grow on average by about 11.5% per year for the next few years, the utility should continue to outperform Fortis as an investment.
The difference in compounded returns can add up to make a big difference — the longer you hold, the bigger the difference.
An investment of $10,000 with 12% annualized returns transforms to north of $33,000 in 10 years. If the same amount were invested for an 8% rate of return, it would have grown to only $22,200. That’s a $10,800 difference!
Every additional percentage of returns you earn from your portfolio will make a big difference in the long run. So, consider investing in tomorrow’s outperformers when they’re underperforming today!
If so, you’re in luck! Because we just tapped one of our top analysts -- and experts in this field -- and asked him to put together a special report highlighting three of his favorite dividend-payers to buy right now.
These three “Cash Kings” have an average yield of 4.0%... are poised to profit from three diverse (and highly crucial) sectors of the economy… and look like they have the ability to grow their dividend well into the future.
For a limited time you can get a copy of this brand new special report by simply clicking here.
Fool contributor Kay Ng owns shares of ALGONQUIN POWER AND UTILITIES CORP. and FORTIS INC.