Investing in the broad market is easy, thanks to the proliferation of exchange-traded funds. One click gives you exposure to the entire S&P/TSX Composite Index, the U.S. S&P 500, the Dow, or whatever.
You can build a global portfolio with just half a dozen inexpensive ETFs. It’s an easy and generally profitable way to invest.
But at the end of the day, your results will be no better than those of the overall markets. That’s because you’ll own a portfolio that includes both stars and clunkers. Focusing instead on outperforming winning stocks, you could consistently outperform an all-ETF portfolio.
Of course, that’s easier said than done. Money managers are paid big bucks to try to achieve that goal and most don’t succeed. That’s why I suggest investing most of your money, say 75 per cent, in broadly based ETFs. The rest should be carefully allocated to stocks with the greatest potential for above average long-range returns.
How do you identify them? It’s an investment axiom that past performance is no guarantee of future results. But the reality is that a company with a long history of superior results in good times and bad is unlikely to suddenly reverse direction. Yes, it can happen, but not often. Betting on proven winners is likely to be more rewarding long-term than taking a shot on a company with a great story but no profits.
Someone recently asked me: If I had to invest all my money in one stock, which would it be? Microsoft Corp. (MSFT-Q) was the first name that popped into my head. Its Windows operating system has been powering most of the world’s computers since the 1990s and there’s every reason to believe that dominance will continue.
Its Office suite (Word, Excel, etc.) has been successfully transformed from a one-off purchase to a lucrative subscription business model. The company is a leader in cloud storage, virtual communications software and gaming, and is in the process of enhancing its artificial intelligence business.
The result is a bonanza for investors. Microsoft has delivered a five-year average annual rate of return of 38.5 per cent. You won’t find any broadly based ETF that comes close.
We recommended Microsoft in my Internet Wealth Builder newsletter in April, 2018, at US$90.23. The stock closed Monday at US$261.55 for a gain to date of 189.8 per cent plus dividends.
Another company that falls into this category is Thermo Fisher Scientific Inc. (TMO-N). Based in Waltham, Mass., it’s a leading manufacturer of scientific instrumentation including laboratory and health monitoring equipment. It also provides software and services to the health care, biotechnology and pharmaceutical industries, as well as to governments and academia.
Its brands include Thermo Scientific, Fisher Scientific, Applied Biosystems, Invitrogen, Patheon and Unity Lab Services.
Thermo Fisher is deeply involved in the fight against COVID-19, particularly in analysis of the virus, diagnosis and personal protection. The company is working with government agencies and researchers to ensure priority access to instruments, safety supplies and other products to combat the outbreak.
The company was created in 2006 by the merger of Thermo Electron and Fisher Scientific. Today it has annual revenue in excess of US$30-billion and a market cap of about US$190-billion.
In February, Thermo Fisher released very strong fourth-quarter and 2020 year-end results. For the quarter, revenue was up 54 per cent year over year to US$10.55-billion. Net income was US$2.5-billion on a GAAP basis (US$6.24 a share, fully diluted) compared with US$1-billion (US$2.49) in the same period of 2019.
For the full year, revenue increased 26 per cent to US$32.2-billion. Net income was US$6.4-billion (US$15.96 a share), up from US$3.7-billion (US$9.17) in 2019.
The company announced this month that it is buying PPD Inc., a leading global provider of clinical research services to the pharma and biotech industry, for a total cash purchase price of US$17.4-billion plus the assumption of approximately US$3.5-billion of net debt. Wilmington, N.C.-based PPD is a leader in the growing US$50-billion clinical research services industry and operates in nearly 50 countries. In 2020, the company generated revenue of US$4.7-billion.
In February, Thermo Fisher announced it is increasing the quarterly dividend by 18 per cent to 26 US cents (US$1.04 a year). The stock yields 0.2 per cent at the new rate. The company also has a share buyback program.
Like Microsoft, the company has a history of above average performance. The five-year average annual compound rate of return is 27.9 per cent.
Full disclosure: The author personally owns shares of Microsoft.
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Gordon Pape