Foolish readers seeking steady returns may be drawn to one very popular strategy: index investing. This is a passive strategy that aims to track the performance of a broad market index. Cheerleaders for index investing point to the superior performance of index funds and index-tracking ETFs, on average, in comparison to actively managed portfolios. Indeed, over the past decade this strategy has offered consistent returns and limited risk.
They say “if you can’t beat ’em, join ’em” and they have a point. But I say, forget that, you can endeavour to beat index investors.
OK, top indices have performed well in the first half of 2019 but that could soon come to an end. Central banks are gearing up for another round of monetary easing in order to stave off slowing global growth. But there is no guarantee that easing will offset the fallout from global trade tensions, tight labour markets, and pressures from rising debt and shifting demographics. That could mean buying strong, individual stocks is the way forward.
Here are two stocks that have beaten the FTSE 100 index over the past three years. I want to keep with that pace, which is why I’m still high on both today.
Greggs (LSE: GRG) has soared 150% over the past year. The sandwich chain has built momentum throughout 2019 due to solid earnings and improved forecasts. It has hopped on a key trend that it expects to fuel growth: plant-based protein offerings. Look no further than the stunning success of Beyond Meat in the US to see how hyped investors are for this craze.
In January, Greggs launched a vegan sausage roll with a Quorn filling. Demand outpaced supply at first, but Greggs quickly caught up to customer interest and the publicity has been like gold dust. Investors should not underestimate this trend’s growth potential. Plant-based proteins have exploded in popularity and consumers are still shifting away from meat products. This is especially true among younger demographics, so long-term investors need to pay attention.
Greggs has achieved annual returns of 36% over a five-year period compared to 6% for the FTSE 100. It had a price-to-earnings ratio of 37 as I wrote this and an earnings yield of 2.7%. Pricier-than-average, but I still like the stock, especially after that promising plant-based protein product launch.
Softcat (LSE: SCT) stock has climbed 29% in 2019. The IT infrastructure provider has posted solid earnings so far and in May flagged an improved outlook for its annual results. Sales have received a nice boost as demand has soared for its hybrid cloud service. Predictably, analysts have grown bullish in response to the higher projections.
The firm launched its IPO back in 2015 and has been one of the top performers on the FTSE 250 ever since. Over a three-year period, the stock has returned an annual average of 49%. The FTSE 100, by contrast, returned 8.4% over this same timeframe.
Softcat has retreated from all-time highs it set earlier this month and this has pushed its price lower. The stock has a P/E of 34 and a yield of 2.9%, which means you’re going to be paying a premium right now. A May update had the company project better-than-expected growth for the full year. I like the broad-based trends that are supporting Softcat’s growth right now, so I am still in the buy camp at its current price point.
Ambrose has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.