The S&P 500 has climbed at a solid clip in recent years. Since November 2014, the index has generated a total return of 253% (about 13.2% annualized per year), which is above its typical annualized gain of roughly 10%.
There's one unstoppable stock, though, that has crushed the broader market in the past decade, rising an impressive 581% during that time (as of Nov. 11). This would have turned a $10,000 investment into $68,000 today.
Continue reading to learn more about this dominant business and whether it should be in your portfolio.
Simple and predictable
While O'Reilly Automotive(NASDAQ: ORLY) has made for a fantastic investment in the past, it's not going to win any awards when it comes to innovation or disruptive capabilities. This is a thriving aftermarket auto parts retailer, a boring business that couldn't be further from areas like artificial intelligence (AI) or cryptocurrencies, for example.
Despite economic uncertainty worrying investors in recent times, O'Reilly has continued to report solid financial results like clockwork. In the latest three-month period that ended Sept. 30, the company posted same-store sales growth of 1.5%, with the expectation that this figure will rise to between 2% and 3% for the full year. This would mark the 32nd straight year of positive gains with this key performance metric.
The business benefits from durable trends that have led to healthy top-line gains in the past, and that should help going forward. For example, the number of miles that are driven slowly rises each year, which increases the wear and tear on vehicles. Plus, the average age and number of cars goes up over time as well. As more vehicles are outside their original manufacturer's warranty, it creates a larger demand pool for the company.
The leadership team understands these tailwinds. That's why they continue to expand the footprint. In the past 12 months, O'Reilly opened 180 net new stores.
It's also hard to ignore O'Reilly's profitability. Its operating margin has averaged a superb 19.8% in the past decade, due in large part to its scalable business model. The company's size, as exemplified by its network of 6,291 stores and annual run-rate revenue of over $17 billion, gives it tremendous negotiating leverage with its hundreds of suppliers. The result is favorable pricing that helps keep costs in check, leading to strong profits.
O'Reilly also generated $2 billion in free cash flow in 2023. Management often uses these excess cash profits to repurchase stock. Between 2013 and 2023, the outstanding share count was reduced by 45%. This helps boost earnings per share figures because it means that existing investors own more of the business as time passes.
O'Reilly's valuation looks rich
Thanks to O'Reilly's consistently strong performance, shares are historically expensive. They trade at a price-to-earnings (P/E) ratio of 30.4 right now. In the past decade, the P/E multiple has averaged 23.9. Clearly, the market is optimistic about this business's future.
I think investors who prioritize owning high-quality companies for the long term should keep O'Reilly Automotive on their watch lists. The objective should be to wait for a pullback to acquire shares at a more compelling valuation. In my mind, a P/E ratio closer to 20 makes sense before deciding to add the stock to your portfolio.
However, if you care less about trying to wait for the right opportunity and simply want to own a market-beating enterprise, perhaps it makes sense to dollar-cost average every month or quarter. This way, you can build up your position in O'Reilly by taking advantage of multiple price points.
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
