When investing in stocks of high-quality Canadian companies, you don’t always get an initial bargain on your purchase price. High-quality companies often trade at a premium to peers and other companies in the market. This is because they have a secret sauce that enables them to consistently deliver for shareholders.
Image source: Getty Images
Every great high-quality stock has a secret sauce
That secret sauce might be a combination of great products/services, a top management team, a thoughtful strategy, high-returning capital allocation, a durable balance sheet, or a massive economic tailwind.
Many of these companies have already delivered strong, winning returns for shareholders. This means their secret sauce is proven and likely to be repeated. Winners are likely to keep winning.
You don’t get these companies on the cheap, but they always end up being cheap over long investment periods. If you are looking for stocks that are predictable and productive investments, here are two top Canadian stocks to hold for years (and maybe even decades) ahead.
One of the highest-quality businesses in Canada
Constellation Software (TSX:CSU) has to be at the top of the list for companies that persistently outperform the market. Over the past 10 years, the stock has delivered a 30% compounded annual rate of return. The past five years have been almost as good at 26%.
The key to Constellation’s success is capital allocation. It can buy cash-generating vertical market software (VMS) businesses at attractive prices. It reaps the cash flow and then invests it into more businesses.
With hundreds of deals completed, it has the process, know-how, and best practices to make these businesses cash machines.
Given that Constellation has a market cap of $97 billion, the law of large numbers means it will be harder to multiply the bigger it gets. The good news is that Constellation has been spinning out larger, specific parts of its business.
Its European and telecommunication spin-offs have been very successful already. There are likely more spinouts to come.
Its entire executive team are major shareholders of the stock. As a result, their incentives to continue succeeding are highly aligned with shareholders. If there is any stock to hold over a lifetime, Constellation Software is it.
A real estate stock with a great long-term record
Colliers International Group (TSX:CIGI) has a little of everything for a quality-focused investor. It has a great long-term track record. Its stock has compounded total returns by about a 17% compounded rate over the past 20 years. Its returns have not been as good as Constellation, but they are still impressive over such a long period of time.
With a market cap of only $7.1 billion, it could still become substantially larger. Colliers has one of the best brands in the commercial real estate brokerage industry. It has expanded its services across the world.
Interestingly, Colliers is so much more than a broker. In fact, over 70% of its income now comes from highly recurring, higher-margin services. This includes financing, property management, consulting, engineering/project management, and asset management.
The company uses a combination of organic investments and smart acquisitions to grow. In recent years, it has drastically expanded its focus on asset management, as well as consulting/project management services.
Its chief executive officer remains highly invested in the stock and his incentive structure is aligned to deliver long-term shareholder value. Despite its great record, Colliers is not on many investors’ radar. As it continues to prove its strategy, shareholders should see a nice boost as it gets more attention.
