Stocks that have beaten the market in the past have the potential to beat the market again in the future. Here are two outperforming stocks that investors should have on their watchlist.
Canadian Pacific Kansas City
The marriage of Canadian Pacific (TSX:CP) and Kansas City Southern in April 2023 has expanded the large North American railroad company’s footprint into Mexico, which should help fuel double-digit earnings growth.
Canadian Pacific has a track record of long-term growth. For example, in the past decade, it increased its adjusted earnings per share by 11.6% per year. In the last 10 years, the industrial stock delivered annualized returns of about 11.7%, which closely matched its earnings growth in the period. The Canadian stock market returns were only 7.4% per year in this period.
CP’s return on equity has also been historically strong. For example, Morningstar data indicates that CP’s five-year return on equity is 22.8%.
Since the stock has had a dip recently, it could be a good opportunity to nibble some shares for long-term investors. At about $110 per share at writing, the stock appears to be reasonably priced at a blended price-to-earnings ratio (P/E) of about 27. The analyst consensus 12-month price target represents a discount of about 11% in the stock.
Notably, CP’s earnings and outlook could be impacted by the ups and downs of the economic cycle. For example, around the global financial crisis in 2009, it witnessed a 32% cut in its adjusted earnings per share.
Constellation Software
Constellation Software (TSX:CSU) is another top TSX stock that has outperformed the Canadian stock market using iShares S&P/TSX 60 Index ETF as a proxy. It fact, its long-term investors have been very happy with the stock.
For example, an investor who invested in the tech stock just five years ago would have tripled their investment. Specifically, an initial investment of $10,000 would have transformed into about $33,520 for annualized returns of just north of 27%. In comparison, the same initial investment in the Canadian stock market would be worth about $15,740 today for an annualized return of 9.5%.
The company has achieved high revenue and earnings growth from acquiring, managing, and building vertical market software businesses. These businesses typically provide mission-critical software solutions that address the specific needs of their customers in particular markets. Its track record of high returns on equity is also reassuring, as it represents excellent capital allocation on the part of outstanding management. Morningstar indicates CSU’s five-year return on equity is 42.1%.
Because of Constellation Software’s track record of strong execution, the quality stock rarely goes on sale. At $4,115 per share at writing, it trades at a blended P/E of about 43, which seems expensive. However, its forward P/E is below 38, which appears to be a tad more palatable. The analyst consensus 12-month price target also suggests the stock is fairly valued.
For investors who want a piece of the great company, the way to go may be to average into the stock over time via partial shares on a commission-free platform like Wealthsimple.
