If you find great stocks and have an extended time horizon, a $5,000 investment can eventually become a fortune. If you invest $5,000 and earn a constant annual rate of return of 10.5% (equivalent to the S&P 500), your investment could be worth as much as $36,800 in 20 years! That is a 636% total return!
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Pick great stocks and hold them for 20 years
The good news is that if you look carefully, you could potentially double your rate of return by picking the best-quality stocks. For example, if you find a stock that sustains a 21% average annual rate of return, the value of your $5,000 investment could skyrocket to $226,300 over 20 years! That is a 4,426% total return!
Certainly, it is very hard for stocks to sustain elevated rates of return for long periods. However, there are a few that seem to consistently outperform the market. Here are three Canadian stocks that could create generational wealth over the next 20 years.
A potential multi-bagger tech stock
Constellation Software has been one of the best-performing stocks on the TSX over the past 15 years. However, with a market cap of $42 billion, it may be more challenging to compound returns at the same +35% annual rate as in the past. That is why I am intrigued by its recent spin-off company called Topicus.com (TSXV: TOI).
It has a similar strategy to acquire and consolidate niche vertical market software businesses. However, its focus is solely on the European market. Given the differing countries, languages, and cultures, niche software providers are fragmented and plentiful.
Further, if Europe hits a recession, Topicus.com will have a great opportunity to pick up businesses at very attractive prices and high rates of return. At $69, the stock is beaten down and looks attractive for a long-term hold.
A real estate stock with a diversified business
Colliers International Group (TSX: CIGI)(NASDAQ: CIGI) is another stock with an excellent track record. Over 27 years, it has delivered an approximate 20% compounded annual return. Its business doesn’t look to be slowing anytime soon either.
Like Constellation, its growth strategy has largely been supplemented by smart acquisitions. While it is well known as a large commercial real estate broker, Colliers has expanded into lending, property management, design/consulting, project management, and asset management.
Despite an economic slowdown, I still like this business. Over 55% of its earnings are recurring. It has been bolstering its asset management business, which is both reliable and highly profitable. Despite the stock declining this year, its long-term prospects and fundamentals continue to gain momentum.
A Canadian leader in transportation software
If you like technology stocks, Descartes Systems (TSX: DSG)(NASDAQ: DSGX) is another one to hold for 20 years. It is a leading provider of logistics/transportation networks and software. Given geopolitical tensions, the global supply chain is increasingly complex. Fortunately, Descartes helps simplify these challenges for businesses.
Descartes has earned shareholders a very nice 27% compounded annual rate of return over the past decade. The company is very profitable. Likewise, it generates a lot of excess cash, which it generally re-invests into acquisitions. It just announced strong second-quarter results on Wednesday. Revenues and adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) grew 18% year over year.
The company has +$200 million of net cash. If a recession hits, it will be able to deploy this into cheap software businesses. For a high-quality business that is a leader in its field, Descartes is the perfect stock to buy and hold for the next 20 years.
