When looking for stocks to buy for the long haul, it can be good to start by looking at historical returns. Stocks that have outperformed the S&P 500 over long periods are usually indicative of a good business. While the past does not guarantee future performance, assuming the trends look favorable, it's reasonable to bet on the continued long-term success of these companies.
Casual dining chain Texas Roadhouse (TXRH -0.37%), outdoor-lifestyle retailer Tractor Supply Company (TSCO -1.68%), and discount retailer Five Below (FIVE -2.94%) are three companies that fit this description: All have outperformed the market over the last 10 years, and the future looks favorable.
1. Texas Roadhouse
There are about 670 Texas Roadhouse locations, up from about 550 five years ago. Adding more than 100 new locations during this time was a good move because the chain is popular, and it turns a nice profit for a restaurant stock.
Regarding its popularity, Texas Roadhouse is enjoying a 10.1% year-over-year increase in comparable-restaurant sales through the first three quarters of 2023. Yes, the company has increased menu prices, which partly explains the sales increase. But restaurant traffic continues climbing as well, which is what investors want to see.
Texas Roadhouse has generated positive earnings per share (EPS) in every quarter since it became a publicly traded company in 2004 -- even during the pandemic. Its profit margin is usually between 5% and 6%, which is decent. And by regularly repurchasing shares, its EPS regularly climbs at a double-digit rate.
As for growth potential, Texas Roadhouse isn't just one restaurant concept but three: It also owns Bubba's 33 and Jaggers. These emerging chains are small with only 43 and eight locations, respectively.
Neither chain is guaranteed to succeed, and in fact many popular restaurant companies have failed to grow multiple chains. But Bubba's 33 and Jaggers are off to good starts and represent just one example of how Texas Roadhouse could continue growing over the long term.
2. Tractor Supply
Tractor Supply has nearly 2,200 locations around the country, selling agricultural equipment, livestock feed, apparel, and more. You don't have to be a full-time farmer to appreciate the concept. Much of rural America can find things it wants and needs at Tractor Supply.
The chain's loyalty program has more than 30 million members. It might seem like a small thing, but these members accounted for 77% of the company's sales as of the third quarter of 2023. Therefore, the vast majority of sales comes from a loyal customer base, which points to ongoing resiliency.
As with Texas Roadhouse, Tractor Supply's profits are extremely consistent. Over the last 10 years, its operating margin has generally hovered between 9% and 10%, as the chart below shows.
TSCO operating margin (TTM) data by YCharts; TTM = trailing 12 months.
Expect profits to continue going forward, giving Tractor Supply's management plenty of options for rewarding shareholders. One of its preferred methods is a growing dividend. It's paid and grown its dividend for 14 straight years now and shows no sign of slowing, which is great for investors thinking about the long haul.
3. Five Below
Of these three stocks, Five Below might be the least appreciated by Wall Street. And yet its 10-year returns are the best of the bunch.
The company has opened new stores at a fast pace, increasing sales and profits substantially. And this looks like it can continue for the foreseeable future.
Unlike Texas Roadhouse and Tractor Supply, Five Below doesn't pay a dividend. But this is because the company is allocating far more money toward growth. In the third quarter of 2023, the company opened 74 new locations, which was a record. It now has about 1,500.
The company's stores have a payback period of less than one year -- the money invested is made back that quickly. Therefore, expansion is a great use of cash. Management hopes to have 3,500 locations someday, so there's still plenty of growth here for the long haul.
For those wondering how business is doing lately, Five Below's net sales are up 13.7% in the first three quarters of 2023 compared with the same period of 2022. It has also earned net income of nearly $100 million during this time. Moreover, management said that its net sales for the holiday shopping season were up 15.6% from last year, which is strong growth as well.
In short, the future looks bright for Five Below. And recent financial results don't present any red flags with the investment thesis.
Of these three stocks, I believe that Five Below might have the most long-term upside. As it builds out 2,000 more locations through 2030, the company's profits could realistically triple or more. It's hard to imagine Five Below stock underperforming during this time, which is why it's my top pick of these three today.
