The Best Performing Stocks of the Last 20 Years

By David Sterman
May 27, 2011

There's more than one way to skin a cat, as illustrated by the three unique ways the three best performing stocks of the last 20 years made shareholders rich.

Who are these superstar performers?

1) A $10,000 investment in the best performing stock of the last two decades back in 1991 would have netted you a 25,494% gain -- and a cool $2.5 million. It is the single best performer among all 3,000 major stocks trading in the U.S.

2) The market's second-best performer may surprise you. ai 23,000% gain is pretty impressive, especially when you consider the industry it's in. 

3) And in the high-tech space, this firm's scorching 17,000% gain has rewarded visionary investors who recognized the role technology would play in the business world two decades later.

So who are they? And how did they do it? Let's take a closer look to see who the top three market performers of the last 20 years are, and what made them so special.

1. Royal Gold (Nasdaq: RGLD) -- Collecting Checks, Not Writing Them

Digging for precious metals like gold and silver can be a tough business. First, you need to secure a long set of permits. Then it's time to buy lots of heavy equipment, hire experienced staff, and, when all's said and done, hope you still have money left in the bank to pull those first nuggets out of the ground. 

Or, if you prefer, you can skip all that and make investments in other companies' mining efforts. If their efforts pay off, you simply sit back and collect royalty checks.

That's the simple but powerful plan used by Colorado-based Royal Gold. The company started to raise capital in 1990, and now has stakes in more than 30 properties. The company's biggest challenge is collecting a rising stream of royalty checks and depositing them in the bank. And with gold prices surging over the last two years, depositing these larger and larger checks is a good problem to have. Revenue is up 60% year-over-year in the first three quarters of fiscal 2011. 

So what does the company do with all those royalties? Roughly 30% is paid out as dividends, and the rest goes right back into the next crop of mines. Royal Gold has an interest in 23 mines still in development, and another 100 that may get developed in the next few years. Firm gold prices assure that much of those efforts will come to fruition, so this torrid growth stock should keep on growing. 

2. Kansas City Southern (NYSE: KSU) -- Timing Its Decisions to Perfection

In 1887, a grandson of one of the builders of the Erie Canal traveled west to hop on the railroad boom by founding Kansas City Southern. In the 1960s, fears that railroads would be eventually be replaced by ai freight and trucks led management to diversify the business by buying stakes in a financial services firm and other companies. But it was the 1983 deal to acquire a majority stake in Janus Capital that would be a game-changer for Kansas City Southern. Janus went on to be one of the hottest mutual fund managers in the tech-crazy 1990s, and by 1993, Janus was earning more than the firm's core railroad business. 

Mutual fund profits fattened up the balance sheet throughout the rest of the decade, but by 2000, the railroad business needed major investments, so management sold its stake in Janus to pump money back into the flagship Kansas City Southern operations. It turned out to be another brilliant move with perfect timing. The tech bubble burst soon thereafter, taking Janus's value down with it. 

Kansas City Southern's strategy to upgrade tracks, extend routes, and deploy advanced technology helped to make rail freight operators much more competitive with trucking firms. By 2010, Kansas City Southern was able to post operating profit margins of 33% -- quite impressive in what many consider to be a low-margin business.

The outlook remains quite bright. Analysts expect Kansas City Southern to grow sales at least 10% in 2011 and 2012, and profits are expected to grow in excess of 20%. Those moves to invest in the rail network over the last decade are reaping major gains now. Shareholders surely have nothing to complain about after witnessing such stunning gains over the last two decades.

3. Oracle (Nasdaq: ORCL) -- The Market Share Master

Larry Ellison, CEO of software giant Oracle, has never been shy about rewarding himself with handsome pay packages. (Click here to see the list of The 20 Highest Paid CEOs in America.) As recently as 2009, he took home a hefty $84.5 million, helping to propel him into the upper echelon of Forbes' list of billionaires. Shareholders aren't complaining. He's made them a lot of money, too. 

What's Oracle's secret? Ellison understood something thirty years ago that most failed to see: every large company would need to develop a very large database to handle all of the massive streams of corporate data. He also has a ruthless competitive streak. Every time a rival appears on the scene and starts to take market share, Oracle embarks on an aggressive campaign to make life miserable for those rivals, from price wars to free service contracts. 

As demand has steadily grown for Oracle's database software, so has its share price. Most impressively, even as many large technology companies struggle to find growth these days, Oracle keeps on growing. With the exception of fiscal year 2009, sales have risen at least 15% every year since 2005. Thanks to recent small acquisitions, sales likely rose about 30% in the fiscal year that ended May 27, 2011. Few technology companies can boast of that kind of growth. 

The Investing Answer…

These three companies share one fundamental trait: opportunism. While rivals seek traditional ways to generate value, these firms have resorted to unusual methods and tactics to help boost sales and profits. If you're looking for a "home-run" style investment, make sure and focus on companies that don't follow the traditional route and instead find value where others fail to look.