Amid a highly volatile market due to trade war uncertainty, potentially lead to a recession. We think it is helpful to remind investors of the effect of long-term compounding by looking at some of the biggest winners of the last 20 years in the Canadian market. Drawdown is an indisputable component of above-average returns. We think it is crucial that investors maintain a calm and opportunistic mindset; it is when the uncertainty is at its peak that investors can find bargains.

Twenty years is a very long time that may prove the resiliency of these businesses. These companies have been through multiple bear markets of the Global Financial Crisis - 2008, pandemic, under different macro headwinds, etc. and still manage to compound capital at an attractive rate. The majority of them provide basically the same products/services compared to 20 years ago. These are highly resilient, durable business models with a relatively low risk of technological disruption.

Investors who are skillful and lucky enough to buy and hold one of these names could see life-changing returns, making the investing effort in individual stocks worthwhile. Additionally, owning these names has proven to be a tax-efficient way to compound capital as investors practically do not pay any taxes until the investment is sold, and capital gains are treated at a more favourable rate compared to dividends and interest income, most of the time. 

This screener will back on Canadian companies with the highest compounded annual growth rate (CAGR) in total returns over the last twenty years, and whether these are still attractive investments today.

Below we have screened for companies with the following criteria:

• Market cap larger than $50 million
• Highest Total Return (dividend included) over the last twenty years
• Return On Equity
• Forward Price/Earnings ratio

The criteria for the screen are quite simple, as there are only two criteria we use to screen for companies. As usual, we look for companies with a market capitalization of at least $50 million, as these companies not only have decent operating track records for investors to evaluate, but also these companies are more liquid in trading volume, allowing investors to acquire/dispose of positions. Secondly, we screen for the 20 companies with the highest total return CAGR. We also present these companies’ profiles in terms of profitability (return on equity on a trailing-twelve-month basis) and valuation (forward P/E).

The screener came up with some interesting names, members will recognize some of the names that we cover in our Model Portfolios and coverage lists, such as Hammond Power Solutions (HPS.A), Stellar-Jones (SJ), and Boyd Group Services (BYD). Some of the phenomenal compounders in the Canadian markets, like Constellation Software (CSU), Dollarama (DOL), and TerraVest Industries (TVK), etc. are not on this list mainly due to the fact that they do not accumulate enough 20-year lifetime as a publicly traded entity.

Although some are much larger in size now, given their impressive returns, some of them are still relatively small, under a $1 billion market cap. In addition, strong topline growth across the economic cycle is the number one commonality between them. Most of these names have consistently grown by double digits over this long period. As a result, despite a decent run, they still look like attractive candidates for long-term holdings.

A few key lessons from this screener are:

1. Holding is the most important skill: It is not the buying, but holding, that is the hardest part of long-term investing, as investors would constantly be tempted to take some chips off the table.
2. Concentration is a natural outcome of superior compounding: As a result of these huge outliers, a portfolio will be naturally concentrated in a few of these names. We think this is a nice problem to have, but investors need to consider their individual comfort levels and ‘sleep-well-at-night’ position sizing.
3. Let the winners run: Winners keep winning, let them run. Conviction matters in the long term. Hold them tightly as long as the company continues to execute.
4. Small is beautiful: Some of these names are still growing at a healthy pace even to this day, and these companies still look like decent candidates for long-term holding.

Again, these companies on the list are not recommendations but a starting point that helps investors generate potential investment ideas and strategies. Investors can view our previous screener blog here.

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Disclosure: The analyst(s) responsible for this report do not have a financial or other interest in the securities mentioned.