In unpredictable financial markets, investors often seek the elusive formula for long-term wealth creation. The stock market, with its enticing prospects and inherent volatility, presents a formidable challenge to those seeking sustained prosperity. Yet, amid the market’s ebb and flow, certain companies have adopted strategies that harness the true power of compounding, steadily building value over time.
The article explores the intriguing strategies of three companies, each hailing from different sectors, which have one common goal: to secure lasting value growth for their investors.
The first one, a media and entertainment giant, has cracked the code with its multifaceted approach. Leveraging content monetization through subscriptions, advertising, and content licensing, it adapts to market conditions. The second one, on the other hand, has mastered the art of disciplined execution. It is optimizing pricing and strategically integrating acquisitions to unlock cross-selling opportunities and drive revenue growth.
Meanwhile, the third one showcases adaptability by expanding its market presence. It is based on efficiently converting buyers into homeowners and offering smaller, more affordable home options to cater to changing consumer preferences.
So here are three stocks to buy to benefit from the power of compounding.
Paramount (PARA)
Paramount’s (NASDAQ:PARA) strategy focuses on leveraging multiple platforms and revenue streams to maximize the value of its content. The strategy allows the company to monetize its content in various ways, providing flexibility as market conditions evolve. Paramount’s revenue streams include subscriptions, advertising, and content licensing to third-party platforms.
In detail, the company’s strong position in advertising is evident in its digital ad capabilities, with direct digital revenue growing by double digits year-over-year. For instance, the EyeQ digital ad platform may generate revenue approaching $3 billion. It is rivaling some of the biggest players in the digital video ad space.
Additionally, Paramount’s portfolio of sports, including events like the Super Bowl and the GRAMMYs, differentiates it in the advertising market. The company’s branded content capabilities also attract world-class brands, further enhancing its advertising revenue potential.
Furthermore, Paramount places a strong emphasis on being one of the most efficient content producers in the world. The company expects to demonstrate continued gains in content efficiency in 2024 and beyond. Paramount emphasizes that content success depends not solely on volume but on having the right content for the right audience at the right time.
By carefully defining specific audience segments and evolving its programming strategy, Paramount may serve its key audience segments more efficiently. The targeted programming strategy has already shown results, with nearly 0.10% year-over-year improvement in the content expense-to-revenue ratio in H1 2023. This makes it one of those stocks that demonstrates the power of compounding.
Lastly, the integration of Paramount+ with Showtime is expected to lower this ratio further and contribute to margin improvement, leading to a progressive boost in its market valuation over the long term.
McGrath RentCorp (MGRC)
McGrath RentCorp’s (NASDAQ:MGRC) focus on solid execution is reflected in its management of pricing, fleet utilization, and capital deployment, which are key sources of its value creation.
The company has achieved a 30% higher average rental equipment on rent with an average fleet utilization rate of 79.4%. This was achieved even while integrating Vesta’s fleet, which was initially utilized in the mid-70s at the time of acquisition. The ability to effectively manage a larger fleet while maintaining high utilization rates demonstrates the company’s disciplined approach.
Notably, effective execution also extends to other aspects of the business, including disciplined pricing strategies, which have led to a 10% year-over-year increase in monthly revenue per unit of rent, highlighting the company’s ability to adapt pricing to market conditions. Fundamentally, McGrath RentCorp’s ability to optimize pricing is a distinct strength that directly impacts its revenue growth. For new shipments over the last 12 months, the average monthly revenue per unit increased by 13% year-over-year.
Moreover, another key driver of McGrath RentCorp’s growth has been its strategic approach to acquisitions. The acquisition of Vesta Modular and the subsequent integration into the Mobile Modular business are notable fundamental strengths. One of the immediate benefits of the Vesta Modular acquisition has been the realization of cross-selling opportunities and geographic expansion. Sales teams from both Mobile Modular and Vesta have leveraged the combined fleet to win incremental orders. Overall, the synergy resulting from cross-selling will be a substantial driver of additional revenues and growth in the coming years.
LGI Homes (LGIH)
To begin with, LGI Homes’s (NASDAQ:LGIH) strategic expansion is evident in adding ten new communities in Q2 2023. It is bringing the total to 102 active communities. This deliberate approach to community expansion demonstrates LGI Homes’ focus on increasing its market presence.
As of Q2 2023, LGI Homes reported an average of 6.1 closings per community per month in the second quarter, marking a 30% improvement over the first quarter. It underscores the company’s efficiency in converting interested buyers into homeowners, contributing to its robust revenue growth.
Additionally, LGI Homes has solid geographic performance in the top markets. For instance, Dallas/Fort Worth leads the pack with 10.2 monthly closings, followed closely by Charlotte with 10 closings and Houston with 7.9. Fort Pierce, Florida, and Las Vegas, Nevada, both had 7.8 closings per month. Therefore, this empowers the company to channel its resources and strategies into markets performing exceptionally well, optimizing growth.
Furthermore, LGI Homes exhibited adaptability by introducing smaller, more affordable home options in response to market conditions. This shift led to a notable increase in closings coming from homes smaller than 1,500 square feet, from 19% in the second quarter of the previous year to 27% in the recent quarter. This adaptive approach to catering to changing consumer preferences is a pivotal strength that allows LGI Homes to remain competitive.
In terms of leverage against the Fed’s ‘higher for longer’ stance on interest rates, LGI Homes has diligently reduced its debt levels over the past three quarters, resulting in a debt-to-capital ratio of 37.8%. Finally, the company’s strong equity position and a 13% increase in book value per share year-over-year represent its financial stability and long-term wealth creation. It’s also one of those stocks to buy to harness the power of compounding.
As of this writing, Yiannis Zourmpanos held a long position in PARA. The opinions expressed in this article are those of the writer, subject to the Investorplace.com Publishing Guidelines.