There are plenty of large-cap stocks on the market which may look impressive based on their track records, but which have pretty much already finished growing, whether it be because they have already reached market saturation or because competition has disrupted the game. As a company grows, it becomes more and more difficult to achieve the kind of growth that impresses investors and leads to high valuation ratios.
Yet, large-cap stocks still hold appeal because they have already proven they can deliver solid growth and profitability in the past, so investors may feel more comfortable betting on them than a small unprofitable growth stock that they know little about.
To aid in the search for large-cap stocks that still have growth potential, GuruFocus has created the Stalwarts screener, which is based on Peter Lynch’s description of stalwart stocks in his books. Lynch coined the term “stalwarts” to describe large, well-established companies that meet certain criteria for historical growth, strong balance sheets, solid cash flow and growing dividends.
There is no surefire way to predict which stocks can continue to grow, but Lynch observed that profitable companies with historical growth as well as strong balance sheets and cash generation to fund future growth have a better chance than many others. In fact, GuruFocus’ proprietary ranking system, the GF Score, shares several characteristics with Lynch’s definition of stalwarts. According to a historical study by GuruFocus, stocks with higher GF Scores tend to outperform those with lower GF Scores on average. The GF Score is based on five key aspects of analysis: financial strength, profitability, growth, GF Value and momentum.
Adding the GF Score to the Stalwarts screener, three stocks that meet the strict requirements for the Stalwarts screener and have a GF Score over 90 are Intuitive Surgical Inc. (ISRG, Financial), Fastenal Co (FAST, Financial) and Infosys Ltd. (INFY, Financial).
Intuitive Surgical
Intuitive Surgical (INTU) is one of the few stocks on the market with a perfect GF Score of 100 out of 100, driven by ranks of 10 out of 10 for everything except GF Value, which gets a 9 out of 10. Over the past 10 years, the company has grown its revenue per share by an average of 12% per year and its earnings per share by an average of 11.40% per year. Return on invested capital is 16.09%, which is higher than 82% of peers. The company has no debt on its balance sheet.
Intuitive Surgical is a leading developer and producer of robotic products for minimally invasive surgery. Its da Vinci Surgical System platforms have collectively performed more than 10 million procedures worldwide over the past decade, and it still has no true competitor on the market. As the company leverages data from procedures alongside artificial intelligence to improve outcomes, da Vinci’s use-cases continue to expand. Thus, the company looks well-positioned to continue growing at a steady pace.
Fastenal
Fastenal (FAST, Financial) earns a high GF Score of 99 out of 100, with profitability, growth and momentum ranking 10 out of 10, financial strength ranking 8 out of 10 and GF Value ranking 7 out of 10. Over the past 10 years, the company has grown its revenue per share by an average of 8.40% per year and its earnings per share by an average of 10.50% per year. The ROIC of 29.7% outperforms 98% of industry peers. The interest coverage ratio of 94.22% shows the company has its debt expenses well under control.
Fastenal is a distributor of industrial and construction products and tools. There is tough competition in this industry, especially with the advent of e-commerce, and Fastenal has been forced to close approximately 18% of its physical store locations since 2013, and yet it has continued growing its top and bottom lines as well as its dividend thanks to its astute shift to a vending machine model. Fastenal’s vending machines offer on-site convenience and keep costs low, both of which serve as strong competitive advantages.
Infosys
Infosys (INFY, Financial) also earns a GF Score of 99 out of 100, driven by profitability and growth ranks of 10 out of 10, a GF Value rank of 9 out of 10, a financial strength rank of 8 out of 10 and a momentum rank of 7 out of 10. Over the past 10 years, the company has grown its revenue per share by an average of 13.70% per year and its earnings per share by an average of 10.20% per year. ROIC is 26.66%, beating 88% of industry peers. A Piotroski F-Score of 5 out of 9 shows the company’s financial situation is stable.
Infosys is an Indian multinational IT company that provides business consulting, IT services and outsourcing services. This company is helping business in India and around the world transform their technology for the modern era. It also works with companies that want to outsource services such as back office support and customer service, including technology giants like Amazon’s (AMZN, Financial) AWS, which relies on Infosys Cobalt to help customers discover, evaluate and integrate its software and services.
