Hey there, Fools. I’m back to highlight three companies with impressive returns on equity (ROE). As a reminder, I do this because a high-ROE business typically has a strong management team that’s able to efficiently employ investor capital and a rock-solid competitive advantage, which translates into higher returns than that of its rivals.
While ROE isn’t a perfect metric by any means, it remains a solid indicator of industry-leading companies. As Warren Buffett once said, “The best business to own is one that — over an extended period — can employ large amounts of incremental capital at very high rates of return.”
So, without further ado, let’s get to this week’s top dogs.
Constellation sensation
Kicking things off is Constellation Software (TSX:CSU), which boasts a trailing 12-month ROE of 44%. Shares of the software specialist are down 19% over the past three months versus a loss of 14% for the S&P/TSX Capped Information Technology Index.
Concerns over slowing growth have weighed heavily on the stock, but there’s plenty of reason to remain bullish. In Constellation’s recently released Q3 results, net income jumped 21% as revenue increased 19% to $759 million. Moreover, operating cash flow grew 17% to $143 million.
Over the past five years, Constellation’s operating cash flow has grown an impressive 234%.
Constellation is a high-growth stock that seems perpetually expensive. But at a forward P/E in the mid-20s, I’d say that its prospects are now very reasonably priced.
Iconic value
Next up, we have Canadian Tire (TSX:CTC-A), which currently has a solid trailing 12-month ROE of 15%. Year-to-date, shares of the iconic retailer are up 2% versus a loss of 13% for the S&P/TSX Capped Consumer Discretionary Index.
With roughly 1,700 retail and gas-bar locations across Canada, Canadian Tire continues to be one of the most recognized brands in the country. In the last quarter, revenue increased $147 million, or 3%. More important, same-store sales — the key gauge of a retailer’s health — improved 1.6%.
Canadian Tire also remains a shareholder-friendly cash cow. Year-to-date, management has repurchased $379 million worth of shares, with about $170 million more expected for the rest of 2018.
Currently, the stock trades near its 52-week lows. So, it might be time for value hounds to step in.
Proactive opportunity
Our final top dog this week is Gildan Activewear (TSX:GIL)(NYSE:GIL), whose ROE consistently registers in the high teens. Over the past three months, shares of the apparel specialist are up 13% versus a loss of 10% for the S&P/TSX Composite Index.
Gildan is one of the largest vertically integrated apparel companies in the world, using its significant scale to deliver for shareholders. In 2017, the company generated $2.8 billion in revenue, along with $519 million of free cash flow (of which $413 million was returned to shareholders).
Over the past three years, Gildan’s dividends and buybacks have grown at a rate of 49% and 237%, respectively.
The stock has performed well in recent months, but with the price now off about 9% from its 52-week highs — due to the recent market dip — Gildan’s risk/reward tradeoff looks attractive.
Fool on.
Brian Pacampara owns no position in any of the companies mentioned.