It is widely encouraged that every investor should have some level of diversification when they own a portfolio of TSX stocks. The market ebbs and flows by a wide margin throughout the year.
In one period, a certain stock class or sector might excel. However, it may then underperform versus another sector or segment in the next cycle. Consequently, you diversify to offset and balance out risk.
While diversification is certainly important, it has diminishing benefits. Most stock market experts believe 15-25 stocks can provide enough diversification to balance and offset risk but still provide an opportunity for alpha (the ability to outperform the broader index) over time. If you go beyond 25 stocks, your returns are much more likely to mirror and follow the broader market.
Diversify even though two to three TSX stocks could make up most of your returns
Despite diversification, several long-term buy-and-hold investors have observed some interesting findings. Over long periods of holding, they find a few stocks in their portfolio underperform or even decline, a few will provide market returns, a few will do above market, and a couple will provide substantial gains that make up most (or a substantial share) of the portfolio returns.
In investing, it is very difficult to determine which specific stock will provide the motherload of returns. Nobody can predict the future, so diversification is crucial to reduce risk and maximize reward.
If you wisely pick stocks in great quality businesses, you can look to stack your cards. If you are looking for two stocks that could produce “motherload” type returns, these two TSX stocks are interesting.
TFII: A TSX stock on the road to strong returns
TFI International (TSX: TFII) has already been an exceptional stock for current shareholders. Over the past 10 years, patient shareholders have earned a whopping 934% total return.
The most interesting part is that TFI is a trucking business. They tend to be synonymous with low margins, rising expenses, and tough operations. Yet, TFI has several unique attributes that make it a strong long-term stock.
Firstly, it has a chief executive officer who has been with the company for nearly three decades. He is a substantial owner, so his interests and incentives are aligned with shareholders.
Secondly, the company is an exceptional operator. It is a nimble, low-cost operator that has an operational formula to drive profitable business.
Lastly, TFI has been an exceptional capital allocator. It yields a significant amount of cash from its business which it reinvests in acquiring other transport businesses around North America.
The transport industry is very fragmented, so it has considerable opportunities to keep consolidating the sector, even after its strong run already.
GSY: A top-performing financial stock
Another strong TSX stock for long-term investors is goeasy (TSX: GSY). While everyone talks about Canadian banks being great investments, this financial stock has beaten them all. Shareholders have earned a 980% total return over the past decade.
goeasy is one of Canada’s largest non-prime lenders. Like TFI, this is not a flashy market segment. In fact, goeasy serves a riskier segment of the population. However, it has developed a retail network, online presence, and strong underwriting platform that enables it to earn attractive returns at less risk.
The company continues to multiply across Canada. It is still in the early innings of expanding its product/service mix. This stock can be volatile.
Fortunately, the company pays an attractive 2.9% dividend which is a nice reward while you wait. Take a long-term approach and this stock could still deliver strong upside ahead.
