It’s not just the Magnificent 7 that benefit from compounding
Investment icon Warren Buffett frequently extols the virtue of compounding for stocks. That is compounding of companies with competitive advantages, strong finances and usually dividends.
Compounding has a powerful long-term effect, as Buffett has pointed out. For example, if you own a stock that gains 7.5% a year, which is less than the market’s historical average, it will double in less than 10 years.
Plenty of stocks have benefited from compounding. Looking at just the last five years, you’re undoubtedly aware of the surge in huge technology stocks.
That includes Nvidia (NASDAQ: NVDA), with a whopping 2,651% gain during that period; Tesla (NASDAQ: TSLA), with 1,544%; Apple (NASDAQ: AAPL), with 282%; and Meta Platforms (NASDAQ: META), with 200%.
These companies have benefited from growth all over the technology industry, from artificial intelligence, to cloud computing, to the Internet, to electric cars.
But there are plenty of lesser-known stocks that have reaped a bonanza from compounding as well.
Here are five examples, almost all of which pay dividends. They are listed alphabetically:
• Cintas (NYSE: CTAS), which has jumped 236% over the last five years
• Fair Isaac (NYSE: FICO), the only company that doesn’t pay a dividend, has skyrocketed 2,071%
• Motorola Solutions (NYSE: MSI), which has gained 200%
• Old Dominion Freight Line (NYSE: ODFL), which has climbed 271%
• Quanta Services (NYSE: PWR), which has surged 719%
Cintas provides uniform rentals and facility services to businesses. It is by far the biggest player in its field. Morningstar analyst Nicholas Lieb assigns the company a wide moat, meaning he sees it with competitive advantages that will last at least 20 years.
“The business has successfully fended off competition and side-stepped obsolescence for almost a century,” he wrote in a commentary. It has “superior digital analytics, industry-leading employee retention, and denser delivery routes” than competitors.
Fair Isaac is the industry leader in credit-score information. It also earns a wide moat from Morningstar.
“Credit is a very lucrative business,” notes Morningstar analyst Rajiv Bhatia. Credit scores are used for more than just individual lending decisions. The whole financial industry utilizes them as benchmarks.
Fair Isaac’s retention rates and recurring revenue growth have been strong in recent years, he wrote.
Motorola offers a wide array of communication and technology products for public safety and other industries. Morningstar gives this company a wide moat too.
“Motorola is a major player in a sticky business,” wrote Morningstar analyst Eric Compton. “We expect continued growth and margin expansion, with potential upside if the firm can complete additional accretive acquisitions.”
Old Dominion is the second-biggest less-than-truckload carrier in the country. Less-than-truckload means that each piece of cargo takes up less than the truck’s full space.
Morningstar analyst Matthew Young gives the company a narrow moat, meaning he sees it with competitive advantages that will last at least 10 years. “It’s the clear industry leader in terms of execution, freight selection, and service quality,” he wrote.
Quanta Services is a leading specialty contractor for energy, utility and telecommunications businesses. However, Morningstar doesn’t give it a moat.
“The company is a leader among specialty contractors for electric transmission and distribution services as well as its newly acquired renewable engineering, procurement, and construction business,” wrote Morningstar analyst Brett Castelli.
“However, we have not seen its market share leadership translate to superior returns on invested capital.”
For all these stocks, there’s no guarantee they will even keep going up let alone provide stellar long-term returns. But when looking for equities to buy, keep in mind that the benefits of compounding apply just as much to stocks off the beaten path as to the market’s favorites.
The author owns shares of Cintas and Motorola.
