Past performance is no guarantee of future moves in the stock market. You’ve probably heard that saying at least a handful of times if you invest in passive products such as mutual funds, index funds, or exchange-traded funds (ETFs).
And while chasing returns (new investors just love momentum stocks, don’t they?) can be a source of immediate satisfaction, it could set up some to be showing up to the ball right before the punch bowl is taken away, whether by the U.S. Federal Reserve (the Fed), a big corporate earnings fumble, hot inflation data, a black swan event or something else.
In any case, I think that the five-year chart for a stock is worth paying attention to, provided that all other factors (think valuation, fundamentals, capabilities of management, and the long-term growth story) are still looking good. Undoubtedly, whenever you have a good amount of long-term momentum, a dirt-cheap multiple, and underrated growth prospects, you may very well be looking at a winner that can keep on winning for many years to come.
But don’t expect history to repeat itself for the next five years. There will always be things that fly ahead of you that you did not see coming! That’s why I think it’s wise to think long-term (personally, I think five years is a great span to invest for) and only pounce on the stocks they view as a tad underpriced.
In this piece, we’ll tune into two impressive long-term momentum stocks that I think can continue beating the TSX Index over the next five years.
Fairfax Financial Holdings
Fairfax Financial Holdings (TSX:FFH) is a stock that many doubted when it hit rock bottom around three-and-a-half years ago. During the 2020 stock market crash, shares fell as low as $350-ish per share. It seemed like Prem Watsa, Fairfax’s top boss who’s also known as the Canadian Warren Buffett, had lost his market-beating ways.
What a mistake it would be to throw in the towel on Mr. Watsa and Fairfax amid their worst moment in years. The stock eventually went on to skyrocket past $1,500 per share (where shares are hovering today). That works out to be around 333% in gains. And the good news is the meteoric rise may not be over yet. The stock’s still not lofty at 6.4 times trailing price to earnings. Further, the 1.3% dividend yield remains a nice bonus to a momentum story that’s coming into its own.
Over the past five years, shares more than doubled, surging nearly 140%. Over the next five years, my bet would be FFH stock has a good chance of pulling it off again. With Watsa playing the long game and fundamentals improving from across the board, FFH is not a stock to bet against!
Constellation Software
Constellation Software (TSX:CSU) is another top performer that’s been hot in recent years, up 203% in the past five years. With earnings on tap in around a week from now, CSU stock may have the nudge it needs to hit new highs after its latest 7% dip off its peak. Though I’m not one to play a stock on earnings, I do think it makes sense to keep CSU stock on your radar, just in case the coming results fall short of the estimates.
At the end of the day, Constellation has found a way to grow by spotting value and talent in Canada’s software scene. With generative artificial intelligence innovation paving the way for many startups and unicorns, I’d argue there’s more opportunity for Constellation to go after with its sound balance sheet. All considered, CSU stock is a great gainer that I’d stash away in a Tax-Free Savings Account for the long haul.
