Stocks that on the average can consistently grow earnings by at least 10% annually could double in about 8 years, about the time of a regular business cycle.
Business cycles are usually six to eight years long. Same goes roughly for property cycles as well – seven to ten years. You can’t predict exactly when the next peak or trough will come.
Even world-famous investor Warren Buffett will not give predictions of where the stock market will be in one month, one year or even five years from now. He just concentrates on companies with a high return on equity and big profit margins. In his mind, they have the best chances to keep on growing earnings as they did previously.
I have put together a list of three stocks that have, on average, for the past five years been able to grow earnings a compound 10% or more annually. Also, I think they have the capability to do so over the mid to long term.
1) CSL Limited (ASX: CSL) The $30.4 billion biopharmaceutical company has over the past five years grown earnings a compound 15% annually. That’s pretty remarkable for such a large company, yet it has been very successful internationally, developing medical products for blood disorders and viral diseases.
Analyst consensus forecasts indicate slightly slower growth of about a compound 12% annually for the next two years. It has a lot in its medical development pipeline to support that growth.
2) Flight Centre Travel Group Ltd (ASX: FLT) By now most Australians would immediately recognise the brand name for travel and holiday reservations… but how many bought shares in it? Those who did saw company earnings up an average compound 10% annually over the last five years.
Looking forward, as it grows the brand and franchise network here at home, it is entering into big travel markets like the US, the UK and Asia to keep that growth up. Analyst consensus forecasts have earnings possibly increasing an average 9.5% annually in the next two years. That may be a little less than our target 10%, yet just in the last year it grew full year earnings 23%, so it may still meet our goal.
3) Domino’s Pizza Enterprises Ltd. (ASX: DMP)
The famous pizza takeaway chain business has risen in share price incredibly since listing in 2005. Earnings have also – about 19% on average annually over the past five years. With it is new 75% stake in Domino’s Pizza Japan and plans to grow that chain of stores from about 260 to 600 over the next five years, as well as further expansion in France, it could keep up a similar rate of growth.
Analyst consensus forecasts are calling for earnings to rise as much as a compound 24% annually over the next two years. The pizza business still has a lot of room to expand into, so if you like eating the product, you may like the stock just as well.
Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned.
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