The S&P 500 Index and the TSX Composite Index of stocks are up respectively 9.5% and 6.2% in 2024. While it isn’t a raging bull market, those are still solid returns for stocks. It has been a solid and unexpected recovery after 2023 was a lacklustre year for stocks.
Certainly, what happens in the broader market affects individual stocks. However, when you buy stocks in high-quality businesses, it matters less. A stock follows the earnings and free cash flow per share growth of its company.
Forget about the market when you buy quality compounding stocks
Stocks fluctuate above and below the intrinsic value of a company. Yet, over long periods of time (like five years or more), a stock’s trajectory follows its earnings/free cash flow growth.
The broader market or index just doesn’t matter. What matters is that a company can consistently sustain strong and predictable earnings growth.
To do this, it needs a strong balance sheet, insightful management, great products/services, and a sustainable strategy. If this seems appealing to you, here are two TSX stocks that could outperform in the long run.
A TSX software stock that has beaten even the biggest and best
Constellation Software (TSX: CSU) has delivered outstanding returns for more than a decade and a half. When people think of great software stocks, they often think of Amazon.com or Microsoft. Both have been excellent investments over the past 15 years. However, this TSX stock has massively outperformed both.
Its stock is up 14,062% versus 4,659% for Amazon and 2,179% for Microsoft. In the mid-2000s, Constellation saw thousands of vertical market software businesses that were cheap to buy and efficient to operate. As a result, it started acquiring a mix of businesses across geography and application.
Today, it has +900 businesses under its umbrella. The great news is that it has tens of thousands of prospective acquisition targets across the world. Not only is Constellation a great acquirer, but it is also an excellent operator.
Recently, it has been very successful with several turnarounds and cut-outs. Constellation is not the cheapest TSX stock, but there are many reasons why it could continue to perform over the long run.
A TSX transport stock that could provide years of gains ahead
TFI International (TSX: TFII) has been another great TSX performer. Its stock is up 699% over the past 10 years. That is a 23% compounded annual growth rate (CAGR). Add in its growing dividend, and you get an extra 2.5% of compounded annual returns to that equation.
TFI has grown to become Canada’s largest shipping, logistics, and transportation company. It has also grown significantly in the U.S.
While it does not operate in the most exciting or profitable industry, it wins the day by operating prowess, financial prudence, and wise capital allocation (acquisitions, share buybacks, and dividend growth). The company has a long-term chief executive officer who is also highly invested in the company.
This TSX stock trades at a fair valuation today. However, it is discounted to many of its larger U.S. peers. It has many catalysts to unlock long-term value. This includes spinouts, business divestments, more acquisitions, or significant share buybacks. TFI still has a strong runway to deliver strong shareholder rewards in the years ahead.
