The financial media may focus its attention on earnings per share and a variety of non-GAAP metrics that companies selectively provide, but sophisticated investors know the truth. Return on invested capital (ROIC) is the primary driver of shareholder value creation.
Don’t just take our word for it. Many third-party research papers confirm:
- McKinsey & Company found that improving ROIC led to more sustainable value than growth.
- S&P Global found that stocks with top-quintile ROIC improvement outperformed the S&P 1500.
- Michael Mauboussin of Credit Suisse showed that differences in ROIC explain the majority of differences in valuation for a wide variety of industries.
Recently, a wider swath of the market seems to be taking notice. Earlier this month, the Wall Street Journal published an article titled The Hottest Metric in Finance: ROIC. We’re taking it a step further, and have created a new Model Portfolio.
This model portfolio only includes those companies that not only receive our Very Attractive rating, but also tie executive compensation to ROIC. Superior compensation policies represent an underappreciated competitive advantage that should drive these 15 stocks to outperform in the future. In addition, by including only companies with strong businesses and cheap valuations, we give investors a margin of safety with the potential for outsized returns.