S&P 500 corporations are in the business of managing other people’s money — the debt holders and the shareholders.
To measure how effective these corporations are in achieving this goal, Wall Street uses the Total Shareholder Returns (TSR). It measures the shareholder returns of each corporation stock over a specified period as the sum of market gains and dividends. Then, it compares these returns to the S&P 500 index gains to determine whether the corporation overperformed or underperformed the market.
However, TSR has a couple of limitations as a valuation metric. First, it is conducive to financial engineering, like the sale of debt to purchase shares, which could boost short-term performance at the expense of long-term performance.
Second, TSR is a market measure, so it is sensitive to trader and investor sentiment. For instance, the TSR of popular stocks could get a boost from the fear of missing out sentiment (FOMO), while the TSR of unpopular stocks could suffer from the fear of losing out (FOLO).
Third, TSR doesn’t consider the opportunity cost of capital committed to a corporation, either in the form of debt or equity.
To overcome this problem, economists use another valuation metric, Economic Value Added (EVA). That’s the difference between the return on invested capital (ROIC) and the weighted average cost of capital (WACC).
WACC is the “normal profit” of investing. It’s what investors can earn by investing their money in equity and debt funds that match the performance of popular market indexes like an S&P 500 ETF Trust, a U.S. government debt index like iShares 20+ Year Treasury Bond ETF, or a combination of both.
Thus, EVA measures economic profit (EP) or superior market returns — returns that are more than the opportunity cost of capital invested in different companies.
In a research paper I co-authored recently with Gabrielle Russo, a student of mine at Columbia University, we calculated both the Cumulative Average Growth Rate (CAGR) of TSR and the CAGR of TVA of the S&P 500 members for the period 2013-2023. Then, we ranked the results to identify the top performers.
The table below provides the ten corporations in terms of 10Y CAGR TSR. NVDA Corporation, Advanced Micro Devices, Tesla, and BuldersFirstSource top the list, with a TSR rate between 37.07% and 61.93%.
Top 10 Companies by 10Y (2013-2023) Total Return CAGR
- NVDA Corporation
- Advanced Micro Devices
- Tesla
- Builders First Source
- Broadcom Inc.
- Enphase Energy
- Cadence Design Systems
- Monolithic Systems, Inc.
- Fair Isaac Corporation
- Axon Enterprise
The following table provides the Top 10 performers based on10Y CAGR TVA. Media leader Omicron Group tops the list, followed by On Semiconductor Corporation, Builders FirstSource, Inc., and Arista Networks. They all deliver a CAGR EVA rate between 52.86% and 103.55%, meaning they created plenty of excess returns for capital holders allocating capital over the said period.
Top 10 SP 500 Companies by CAGR TVA
- Omnicom Group Inc.
- ON Semiconductor Corporation
- Builders First Source, Inc.
- Arista Networks, Inc.
- Electronic Arts
- Tapestry, Inc.
- Pioneer Natural Resources Company
- Monolithic Power Systems, Inc.
- Constellation Brands, Inc.
- Diamondback Energy, Inc.
Only two companies, Builders FirstSource and Monolithic Power Systems, are included in both lists. In addition, most of the companies in the TSR list have a popular theme that has attracted the momentum crowd.
These are investors that pay more attention to the corporation’s promise to change the world and less to the excess returns the corporation creates in allocating capital to profitable opportunities. For instance, Nvidia Corporation, which tops the list, has been promising to transform the gaming, cryptocurrency, and AI industries. AMD, second on the list, is another play in the AI theme, while Tesla, third on the list, is the dominant play in the EV revolution.
