Great investors like Warren Buffett, Chuck Akre, and Francois Rochon take a long-term approach to buying stocks and businesses. Their portfolios may not be full of the fastest growing stocks.
However, they tend to deliver stable 10–15% growth perpetually. If you can steadily grow by that rate for a long time, you can often do extremely well at lower risk.
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The greatest investors buy high-quality stocks and hold on for years
Great investors often look for high-quality businesses. These businesses tend to have strong management teams (who are often heavily invested in their stock), products or services that provide high value to their customers, recurring/resilient revenue streams, operating leverage (i.e., the larger they grow, the more profitable they become), and conservative balance sheets.
Canada is fortunate to have many of these types of stocks. While they may not be the quickest growers, they have the capacity to generate very strong returns over the next 10 years.
Here’s one stock that has been successful over the past 10 years, and one that could be a worthwhile $10,000 investment for 10 years to come.
Descartes Systems: A stable and steady growth stock
Descartes Systems (TSX: DSG) has provided patient shareholders considerable returns. DSG is up 687% over the past decade. That is a 22.9% compounded annual growth rate (CAGR).
The company has built out the leading logistics network in the world. It has an array of services that help transport/logistics heavy businesses maximize productivity, profitability, and performance. With geopolitical tensions rising around the world, demand for its services should only grow. It tends to earn an elevated mix of high margin, recurring revenues.
Descartes has built out a pristine balance sheet with $280 million of net cash. It has been a very smart software consolidator, and it is primed to continue that trend. The logistics software provider has been growing EBITDA (earnings before interest, tax, depreciation, and amortization) by a mid-teens rate for a decade.
If the company can continue to execute (like it has), similar growth is likely ahead. The biggest problem is this stock is extremely expensive with a price-to-earnings ratio of 68 and an enterprise value-to-EBITDA ratio of 32. DSG is a good buy on pullbacks. The stock has the characteristics you want in a long-term compounding stock.
TerraVest: An underfollowed compounder for the decade ahead
TerraVest Industries (TSX: TVK) only has a market cap of $800 million. Despite its smaller size, it has already been a great stock for long-term shareholders. TVK is up 1,300% since 2014. Shareholders have earned a 30% CAGR in that time. The stock could have considerable upside ahead.
TerraVest is far from an exciting technology business. It operates a mix of industrial businesses focused on the oil and gas, heating, chemical/gas storage, and transportation industries.
These businesses generate a lot of cash. TerraVest yields the cash and invests in other boring industrial businesses. Since not many other investors want to buy these boring businesses, TerraVest can acquire them for very cheap. The company can apply best practices, operating expertise, and capital to maximize profits and cash flows.
TerraVest has a young, bright CEO and several highly invested board members. If the company can continue to deploy capital wisely (as it has over the past several years), it could provide substantial compounded returns.
Despite its strong growth, it only trades for 16 times earnings. A good valuation, solid business, and very intelligent management team could help make this a strong stock to hold for the decade ahead.
