Prediction: This Stock Will Continue to Trounce the S&P 500...and Here's Why

The S&P 500 index may have just hit another record high, but there has been an even better place to put your investment dollars. Over the past five years, the total return from GPS navigation and wearable technology leader Garmin (NYSE: GRMN) has trounced that of the popular stock index. And there's good reason to think that record will continue.

The S&P 500 just breached the 5,300 level for the first time and closed at another new record this week. The index holding a widely encompassing array of company stocks has doubled in the last half decade, when including dividend payments. But Garmin shares have returned about 150% in that time. And a surge after its most recent quarterly earnings report could be the start of more to come.

GRMN Total Return Level Chart

GRMN Total Return Level data by YCharts

Winning the race

Garmin has a diversified lineup of outdoor lifestyle product offerings. The company pivoted from a focus on automotive GPS years ago, and the business has been in growth mode for the last decade. Sales in its fitness segment soared 40% to a new record in the first quarter.

Every segment reported higher year-over-year revenue with total sales increasing by 20%. The company's most recent guidance is for 10% sales growth in 2024 over 2023. Those growing sales are why the company's profits have been steadily increasing for years, as the chart below shows.

bar graph of Garmin net income from 2006 to 2023.

Data source: Statista

Even Garmin's automotive segment has been rejuvenated. Sales to auto original equipment manufacturers (OEMs) jumped 58%, mainly driven by growing shipments of domain controllers to BMW. That is one example of how Garmin is constantly innovating and developing new technologies for retail and commercial customers.

Cash flow provides options

There's one key area of Garmin's business that points to why it can continue to outperform the S&P 500 in the coming years. The company generates enormous amounts of cash. Operating income of about $1.1 billion last year was 6% higher than the prior year. And that cash being generated from operating activities is being put to good use to ensure growth continues.

A look at its history of research and development (R&D) spending tells the story.

bar graph of Garmin R&D spending over the last 10 years.

Data source: Statista

That R&D has led to new products from Garmin along with upgrades for existing offerings. Garmin's smartwatches have been known for long battery life that is measured in days and weeks rather than hours. But it now has solar charging capabilities for some models, effectively keeping batteries charged for months.

Health science developments include a growing number of sleep tracking metrics and an electrocardiogram (ECG) app that can record heart rhythms and check for signs of atrial fibrillation (AFib) or normal rhythm. New safety options include its inReach satellite communication device that can notify emergency services and an underwater communication network for diver-to-diver messaging.

Those are all features that help Garmin attract new customers as well as entice upgraded purchases from existing ones. And yet even after investing back in the business, there's still plenty of cash left over for returns to shareholders.

Garmin pays a dividend that has steadily grown over the years and has a new share repurchase program. With about $3.3 billion in cash and marketable securities on its balance sheet, the company also has the ability to grow through acquisitions. Those ingredients add up to a recipe that can lead to another five years of market-beating returns for Garmin investors.

Should you invest $1,000 in Garmin right now?

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Howard Smith has positions in Garmin. The Motley Fool has positions in and recommends Garmin. The Motley Fool recommends Bayerische Motoren Werke Aktiengesellschaft. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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