The S&P 500 is a weighted fund that holds 500 profitable corporations. Firms with the largest market caps have the largest concentrations within the fund. While many investors define this index as the broader market, it’s possible to outperform this popular benchmark.
If you want to outperform the S&P 500, you first have to know its historical performance. The index is up by 31% over the past year and 86% over the past five years. While those numbers slightly fluctuate each day, they are your targets if you want to outperform the S&P 500. These are some stocks to consider if you want to crush the index over the next few years.
Invesco S&P 500 Top 50 ETF (XLG)
Have you ever wondered what would happen if you invested in the Top 50 stocks in the S&P 500 instead of all 500 of them? Many ETFs have the answer to this question and make a case for ignoring the common benchmark with 500 corporations.
The Invesco S&P 500 Top 50 ETF (NYSEARCA:XLG) only spreads its capital across the top 50 stocks in the famed index. The result has been steady outperformance. XLG has gained 41% over the past year and 110% over the past five years. Both of those growth rates are better than the S&P 500, and the trend is likely to continue.
By investing in a smaller subset of corporations, XLG ignores many of the companies reporting year-over-year (YoY) declines in revenue and net income growth. These blunders are less common for the larger corporations within the fund. Big corporations can have bad years, but smaller stocks in the S&P 500 may be on their way out. XLG ensures you don’t have exposure to those bad apples.
Microsoft (MSFT)
Looking deeper into the S&P 500’s holdings can help you find stocks that will outperform the fund. In fact, the S&P 500 is a goldmine for them. That’s because numerous winning and losing stocks result in the gains you see. Gains and losses cancel each other out, but looking closer will reveal the top performers.
Microsoft (NASDAQ:MSFT) has consistently been a winner in the S&P 500. The $3 trillion company is the S&P 500’s largest holding and has fueled a good percentage of the index’s total gains. Microsoft shares are up by 55% over the past year and have gained 265% over the past five years.
The firm is capitalizing on cloud computing, artificial intelligence and other promising growth verticals. Those initiatives helped the corporation record 18% YoY revenue growth in the second quarter of fiscal 2024. Net income jumped by 33% YoY.
Duolingo (DUOL)
You don’t have to look in the S&P 500 to find stocks that will outperform. Although Duolingo (NASDAQ:DUOL) is not yet a member of the S&P 500, it has the potential to deliver impressive returns for long-term investors.
The stock’s only weakness is its lofty valuation. Shares currently trade at a 139 forward P/E ratio. Despite the high valuation, investors have elevated the stock by 80% over the past year. An impressive financial report is fueling the stock’s renewed excitement.
Duolingo reported high revenue and active user growth rates. It’s no surprise that Duolingo reported strong growth in both areas. However, the big surprise in the company’s Q4 2023 report came from its net income growth.
Net income reached $12.1 million in the quarter compared to a net loss of $13.9 million in the same period last year. Duolingo had only been profitable for the two previous quarters, so investors were expecting a three-peat, which the company delivered. The big surprise was the net profit margin reaching 8%. Margins for the two previous quarters did not reach 3%.
Rapid net profit margin and continued revenue and user growth will improve the valuation. Duolingo is capitalizing on the large market of people who want to learn new languages for fun or to adapt in new countries. The educational app’s math and music additions create more opportunities and will increase the app’s total addressable market.
On this date of publication, Marc Guberti held a long position in MSFT. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
