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.
Adopting the Customer’s Lens
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.
Exploring the Success of Five Stocks
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.
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.
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.
Strategic Valuation Matters
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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