Running a successful public company involves more than just making a profit, based on on your day-to-day operations.
Every business raises money to operate, either by borrowing or by issuing shares, and that money costs something. The real question is whether a company earns more than its capital costs. The metric that captures it is Return on Invested Capital
, or ROIC. Warren Buffett uses it. So does investor David Driscoll.
In the latest episode of Ticker Take on YouTube, I spoke with Driscoll, President of Liberty International Investment Management. He first started paying attention to ROIC in the 1990s at the credit rating agency DBRS, where he found that the companies with the highest returns on invested capital also tended to be the best long-term investments.
The logic is simple. A company earning 15 per cent on the money it invests, against a cost of capital of 8 per cent, is creating real value with every dollar. That gap funds dividends, acquisitions, R&D and lower debt. Driscoll layers in a few other filters: operating margins, a debt-to-cash-flow ratio of two years or less, cash conversion above 85 per cent, and a clear competitive moat.
With that framework in mind, here are the 10 stocks he highlighted. As always, this is not financial advice.
ASML Holding (ASML)
ASML makes the lithography machines that allow the world’s chipmakers to keep shrinking their designs. Driscoll likes it as a rare European tech name with a large backlog, a wide ROIC gap and a dividend that has been growing at a double-digit rate.
Microsoft (MSFT)
One of the hyperscalers powering the AI build-out, with access to OpenAI and ChatGPT. Driscoll thinks investors are underestimating Microsoft’s work in quantum computing and its push into nuclear power to feed future data centres, including the deal tied to Three Mile Island.
Comfort Systems USA (FIX)
Comfort Systems has surged since Driscoll’s firm bought the stock roughly a year ago. The company builds the heating, cooling and electrical infrastructure that data centres rely on. Driscoll remains bullish on the business, but has already trimmed his position and suggests new buyers consider starting small given the run.
Lam Research (LRCX)
Another supplier to the chip industry, with heavy revenue exposure to Asia. Driscoll sees ongoing chip miniaturization driving demand, while the geographic mix offers a natural hedge against currency risk.
Heico Corp (HEI)
Heico makes replacement parts used in the aerospace industry and has been a long-running compounder, up roughly ten-fold since Driscoll first bought it more than a decade ago. The stock has struggled recently on airline industry concerns, which Driscoll sees as a better entry point than six months ago.
Franco-Nevada (FNV)
The lone Canadian name on the list. Franco-Nevada doesn’t mine anything itself but owns royalty streams on what other miners produce, giving investors exposure to a potential commodities bull market without the volatility of a single producer.
Idexx Laboratories (IDXX)
Idexx makes diagnostic equipment for veterinary clinics. Driscoll sees a long runway as millennials and Gen Z adopt pets at a faster rate than they’re having children. Plus, its software-driven business model is profit friendly and produces one of the widest ROIC gaps on his list.
Chubb Limited (CB)
One of two stocks Driscoll says he bought before Warren Buffett did. Chubb is a global leader in property and casualty insurance, with a combined ratio closer to 85 per cent versus an industry average of about 90, and a dividend that tends to grow faster than its peers’.
CME Group (CME)
CME runs the world’s largest market for futures and options. Driscoll describes it as a casino that takes no risk, matching counterparties and collecting a spread on both sides, with trading volumes rising as markets stay volatile.
Graco Inc (GGG)
The name Wall Street likes the least out of all of Driscoll’s picks. Graco makes industrial pumps and sprayers, and its contractor and automotive segments are under pressure from a slower housing market and tariffs. Driscoll calls it a dollar-cost-averaging opportunity, with a wide ROIC gap that should drive earnings higher when the cycle turns.
The Ticker Take
Profit and value creation are not the same thing. A company can post earnings every quarter and still destroy shareholder value if those earnings cost more to produce than they’re worth.
ROIC is one of the cleanest ways to tell the difference. Some of Driscoll’s names are tied to the AI build-out. Others have nothing to do with it. What they share is a track record of earning more than their capital costs, across cycles. For long-term investors, that’s a more durable test than whatever theme is in favour at the moment.
Jon Erlichman is a BNN Bloomberg contributor and the host of Ticker Take on YouTube.
