Perhaps it is just a natural extension of our celebrity culture, but I find it amazing that most of the financial commentariat focus on what have been called ‘celebrity stocks,’ – the Amazons, Apples, and Alphabets (previously Google) of the world. There are good reasons, of course, why companies such as these command our attention; after all, in terms of market capitalization they are among the largest companies in the world, and movements in their share prices can sway the markets in ways smaller stocks cannot. The downside to this narrow focus, however, is that oftentimes less prominent companies get overlooked, and this despite that many have been proven to be worthier investments than their more celebrated peers.
Looking for these unloved stocks is a pastime of one of my favorite bloggers, Eddy Elfenbein. Eddy, who blogs at Crossing Wall Street, is fond of saying that investing is simpler than we think, and that we would do well to look for companies with everyday applications and long-term viability such as Public Storage and Nathan’s Famous instead of the trendier stocks that dominate the financial media. Eddy is also fond of looking for companies that are ‘under the radar’ in the sense that few if any analysts cover them. Given my own affinity for investing in this manner, I thought it would be interesting to demonstrate a few historical examples of how boring, unloved, or relatively unknown stocks can sometimes generate greater rewards for patient shareholders than their celebrity peers.
Take, for example, Apple. which is the largest company in the world. The company’s CEO, Tim Cook, boasts 3.62 million followers on Twitter; A Google search of “investing in Apple stock” yields 21,600,000 results. Compare this to Hormel Foods with only ~52,000 followers. A Google search of “investing in Hormel stock” generates fewer than 200,000 results. I’m sure most would find it amazing, however, that the maker of SPAM has outperformed the maker of iPhones and iPads since the latter’s December 1980 IPO:
Ford Motor Company, has a current market cap of $47 billion, and boasts almost a million Twitter followers. Conversely, lowly WD-40 Company, with a market capitalization of $1.6 billion, has fewer than 10,000 followers on Twitter, and a Google search for links related to investing in its stocks generates roughly half the results of a similar search for Ford stock. However, since it started trading in January 1973, the maker of a very boring product certainly each of us has in his or her homes has far outperformed the maker of Mustangs and F-150s:
Finally, consider the examples of everyone’s go-to search engine, Alphabet, and NewMarket Corporation, which is a mid-cap company that specializes in the manufacture of petroleum additives. Alphabet’s Twitter feed has 16 million followers, while (as far as I can tell) NewMarket has no Twitter presence. There are more than 48 million results when someone Googles “investing in Alphabet,” while a similar search for NewMarket Corp. yields only ~400,000 results. Furthermore, according to Yahoo! Finance, more than forty analysts cover Alphabet’s stock, but there are only two shown for NewMarket. Yet, since Alphabet’s August 2004 IPO, NewMarket’s shares have trounced the search giant:
It is possible that these are simply random if not unfair comparisons, and it goes without saying that what has happened in the past does not tell us much about what will happen in the future. But the valuable lesson here is sometimes investing is counter-intuitive. Oftentimes the companies we take for granted perform better over the long run than those with greater sex appeal. It is also true as evidenced by the cases of NewMarket and WD-40 that looking into smaller companies with good prospects can be richly rewarding. Peter Lynch is often quoted as having said, “Invest in what you know.” We would do well to remember that that applies not just to the most prominent corporate names in our everyday lives, but also to the lesser-known, but equally as important, companies, too.
*All return data from Morningstar; end date for graphics: 9/30/2016
Disclosure: Past performance is no guarantee of future results. Both the author and clients of Fortune Financial may hold positions in some or all of the securities mentioned.
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