The Misfits: Landstar System (LSTR)

Can a stock still be a quality investment if it hasn't been beating the market?

Halt of Caravans at the Wells of Saba (Beersheba) in the Desert South of Hebron, Charles Louis de Frédy, Baron de Coubertin, 1850, oil on canvas (Metropolitan Museum of Art)

The goal of (most) individual stock investing is to beat the broader market’s returns. If picking individual stocks doesn’t beat the market, then what’s all this extra effort for in the first place? We could all just park our money in a broad-based index fund and spend our time on more pleasurable things than reading annual reports and proxy statements.

Over the past century, the S&P 500 has generated an average annualized total return (so reinvested dividends) of 10.57%. Picking stocks that can generate annualized returns slightly more than this (let’s say, 2% higher) should lead to substantially more wealth over multiple-decade horizons.

But what if the returns of the market are considerably higher than that? In times when the market generates returns higher than its long-term average, it should be harder to pick market-beating stocks.

The S&P 500’s annualized returns over the past 15 years are 15.7%. The only times in market history when the S&P 500 had 15-year annualized returns higher than this were 1955-1965, 1990-1991, and 1993-2000. This decade and a half has been a top quintile performance. We could also say the same about 10-year and 20-year annualized returns. Pretty much any way you slice it, this run of market performance has been in the top 20% of the past century.

Therefore, historically speaking, this is one of the most challenging times to pick individual stocks to beat the market. I don’t mean it is hard to say large-cap tech companies will outperform. Instead, fewer available stocks can beat a 15.7% annualized return over 15 years.

Does that make a stock that has beaten the broader markets' long-term results but hasn’t kept pace with this torrid 15.7% rate a bad investment right now?

This is the question I ask when I look at Landstar System (NASDAQ: LNST). While the company’s long-term results have run laps around the market, it’s returns over the past 15 years are around 12%. That’s enough to beat the longer-term returns of the market, but it has been between a market performer or underperforming over this more recent timeframe.

(if you’re saying, “hey, you said the annualized returns of the S&P 500 were 15.7%, why does this chart show 14.35%?”. Koyfin’s data shows the SPDR S&P 500 ETF return after fees and taxes, hence the discrepancy)

Does this make Landstar and stocks with similar performance a bad investment?

It depends.

Let’s look at Landstar Systems and see whether an investment in it (or companies with similar returns) is still investment-worthy.

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Shoutout to Koyfin for their data and charts. Koyfin has become an integral part of how I screen for, track, and analyze companies. It has made the analysis process much faster thanks to having a decade of data at my fingertips instead of manually going through stacks of quarterly and annual filings.

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