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ROIC Rockstars: Top 3 Stocks for Long-Term Rewards ROIC Rockstars: Top 3 Stocks for Long-Term Rewards

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If youโ€™re seeking stocks that consistently outperform the S&P 500, a good starting point is to evaluate a companyโ€™s return on invested capital (ROIC). According to a recent analysis by MarketWatch, ROIC stocks are companies with high ROIC over the last 20 years.

Historically, these ROIC stocks have tended to outshine the index over the same period. For instance, the indexโ€™s average annual return over the past two decades stood at 9.8%. Notably, the top performers during this period were Apple (NASDAQ:AAPL) and Monster Beverage (NASDAQ:MNST), with annual increases of 37.1% and 36.7%, respectively. Itโ€™s no coincidence that their 20-year average ROIC was 33.0% and 32.5%, respectively.

For the uninitiated, ROIC is a companyโ€™s net operating profit after tax (NOPAT) divided by invested capital, which encompasses the companyโ€™s debt and equity. The easiest way to calculate invested capital is by adding net working capital (current assets less current liabilities), PP&E (property, plant, and equipment), and goodwill and intangibles.

For instance, taking Monster Beverage as an example, Morningstar.comโ€™s ROIC figure for the trailing 12 months stands at 21.3%, slightly less than its five-year average of 25.1% but still quite robust.

My task is to identify three S&P 500 stocks with ROIC percentages surpassing that of Monster.

Booking Holdings (BKNG)

First on the list is Booking Holdings (NASDAQ:BKNG), the online travel agency boasting an ROIC of 39.04%, more than double its five-year average. Its shares have rallied by 53% over the past year and an impressive 94% over the past five years.

On February 20, Seaport Research Partners analyst Aaron Kessler initiated coverage of this travel stock with a Buy rating and a $4,380 target price, roughly 18% higher than its current trading value. Notably, Barronโ€™s pointed out that the stockโ€™s performance was three times better than the index in 2023, with BKNG leading the index by 165 basis points through February 20.

โ€œBooking Holdings is also facing a โ€˜more difficultโ€™ comparison from prior years, but โ€˜we are positive on the [companyโ€™s] fundamentals,โ€™ Kessler said,โ€ as reported by Barronโ€™s.

The analyst forecasts bookings growth of 10% in 2024 and 9% in 2025. Although these figures are below the 24% growth recorded in 2023, they remain relatively healthy after two record years for travel.

Booking Holdings boasts an enterprise value of $130.1 billion, equivalent to 17.7 times EBIT (earnings before interest and taxes), which is less than half its five-year average. Its net debt stands at just $398 million, representing a mere 0.3% of its market cap.

NVR (NVR)

Next we have NVR (NYSE:NVR), the Virginia-based homebuilder with an ROIC of 35.75%, surpassing its five-year average by 390 basis points. Its shares have surged by 48% over the past year and an impressive 177% over the past five years.

Is NVRโ€™s stock considered cheap presently? The company seems to think so. On February 14, NVR announced a $750 million share repurchase program without an expiration date. The buyback excludes purchases from company insiders and the Profit Sharing/401(k) Plan Trust or the Employee Stock Ownership Plan Trust, providing shareholders with assurance of a fair process.

The company reported its Q4 2023 results at the end of January, reporting $454.3 million in homebuilding income from $2.39 billion in revenue. Its mortgage banking unitโ€™s income was $29.7 million. However, while mortgage banking revenue was up year-over-year, its homebuilding revenues declined by 10.5% compared to Q4 2022.

While the builder closed 2023 with 10,229 units sold but not settled, representing $4.76 billion in revenue once completed, cancellation rates stood at around 13%, lower than 14% in 2022 but higher than 9% in 2021, in line with industry trends.

NVRโ€™s enterprise value is $21.5 billion, the equivalent of 11.0 times EBIT, slightly higher than its five-year average. As of the end of December, its net cash was $2.1 billion, or 9% of its market cap.

EOG Resources (EOG)

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