Over the long term, the S&P 500 has produced an annualized return of about 10% per year. For the individual investor who wants to pick single businesses, perhaps the obvious goal is to outperform the broader index over the long haul.
This might seem like a daunting task, as even most active fund managers lose to the market. But I believe average investors can supercharge their returns by focusing on one important characteristic. These stocks are proof that this strategy has merit.
Understanding Customer Perspective
As individual investors, we might forget that we have valuable first-hand knowledge of some businesses out there. That’s because we are also customers of many companies. It’s by using this perspective and identifying businesses that do a fantastic job at taking care of their customers, by offering superior products or services, that we can find potential stock ideas.
At the end of the day, it’s the customers that generate revenue for companies. There is no argument here. This ultimately leads to profits and cash flows, which can result in happy shareholders.
Five Stocks in Focus
If you adopt this mental framework, then it’s actually quite easy to find businesses that delight their customers. I’ve chosen five obvious examples.
Costco (NASDAQ: COST) is loved by its shoppers, who can’t get enough of the low prices and treasure hunt experience. The worldwide membership renewal rate of over 90% exemplifies customer loyalty. It’s also worth mentioning that the number of member households has climbed 40% in the past five years. In the past decade, this top retail stock has generated a total return of 807%.
The restaurant industry is extremely competitive, but Chipotle Mexican Grill (NYSE: CMG) has found remarkable success by focusing on real ingredients, having a simple menu, and providing customers with tremendous value. This is especially true following the health scare in 2015, when the business regained the trust of consumers and investors. Shares are up 226% in the past five years, propelled partly by 114% sales growth during that time.
Image source: Amazon.
Companies in the tech sector also stand out. Just look at Netflix (NASDAQ: NFLX), which disrupted the media industry with its streaming service that now has 278 million global subscribers. The business provided a much better viewer experience at a lower price point than traditional cable TV.
Amazon (NASDAQ: AMZN) founder Jeff Bezos was the first to publicly mention in the company’s 1997 shareholder letter that obsessing over the customer was a top strategic priority. The business’ Prime membership is wildly successful, providing fast and free shipping on millions of items, in addition to other valuable perks.
Then there’s Apple (NASDAQ: AAPL), which sells some of the most in-demand products the world has ever seen. The company’s seamless combination of hardware and software creates a powerful ecosystem that essentially locks customers in, bolstered by an active installed base of more than 2.2 billion. Historically, Apple has been able to flex its pricing power, by introducing new devices at fixed price points while offering older models at a discount — an offer consumers often found too tempting to pass up.
Investors won’t find a lot of investments that fared better than these three. Netflix, Amazon, and Apple have seen their shares soar 933%, 899%, and 768%, respectively, in the past 10 years.
Importance of Valuation
These five stocks are the perfect example of companies that continue to focus on serving the needs of their customers. Investors can look around and find other businesses doing the same thing. It’s another filter to add to your analysis toolkit to use before making an investment decision.
But to be clear, the previously mentioned stocks aren’t automatic buys today. Valuation is another important factor to consider. Looking at the popular forward price-to-earnings ratio in relation to other variables, namely growth potential, I believe investors should wait for a pullback before thinking about buying Costco, Chipotle, and Apple. Netflix and Amazon, on the other hand, look like better buying opportunities at the moment.
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