Boring Stocks lag the maket - But won't for long
My goal today is to bore you. My apologies, but it's true. With all the excitement in the market lately – unemployment dropping to 10%, gold at record highs, the Dubai debt debacle, and financial companies like Bank of America (NYSE: BAC) paying back TARP funds – a dash of boredom is overdue.
I've been looking at a group of stocks that are about as flashy as a stack of corrugated cardboard boxes. But don't let their appearance fool you, inside their drab exterior lies a steady flow of cash. And investors who are willing to step back from the glitz of high-tech companies and the glamour of Wall Street's current darlings could be sitting on a boatload of profits in 2010 if they buy shares of boring stocks right now.
That's because this group of stocks has been overlooked as investors sought higher returns from faster moving stocks. But after the 60% rise for stocks since March, investors are going to start buying more shares in companies that have underperformed, but still have compelling business models and shares trading at reasonable valuations. Both large-caps and small-caps in this category should fare well, but I favor small-caps because they typically rise more than large caps.
I'm talking about you're average Joe companies, those that just aren't that exciting to own. For me this includes wholesaler Costco (Nasdaq: COST), discount retailer Wal-Mart (NYSE: WMT), and consumer goods conglomerate Kraft Foods (NYSE: KFT). Two small-cap companies I like are National Presto Industries (NYSE: NPK) and
The S&P 500 (^GSPC) has increased 63% since the March lows. Over the same period my 'boring' basket of large-caps listed above have increased an average of only 30%. Each stock has underperformed the index, with Wal-Mart shares rising only 10%, Kraft up 27%, and my favorite of the group, Costco, up 54%.
These companies haven't shot up as much as more volatile names during the stock market surge, and offer great values right now. Just take a look at the trailing P/E of each of these stocks: Wal-Mart and Kraft are trading at 16-times earnings and Costco at 24-times earnings. And investors can expect steady dividends from each of these companies.
But their relative underperformance is likely to be short lived, especially given the outperformance of sectors such as retail that were based on lofty expectations. Last week I told you that retail stocks were overvalued (Barron's happened to like my take, and published an excerpt in their Market Watch section - if you missed it, you can read the article on the SmallCapInvestor Daily website by clicking here.
Why am I so certain that these companies are likely to perform well? Because boring companies provide the staples that
But the real opportunity here is in small-cap stocks since they typically outperform large caps. And consumer staples small-caps tend to have less downside risk for the same reason as large-caps in the sector – they generate solid revenues in just about any economic environment. If you're thinking stocks may be overpriced after the rapid rise, than the underperformers may be a good place to look for new opportunities today.
But, if stocks rise through the end of the year, a scenario that I favor and one that today's unemployment data will help, small-cap stocks should outperform once again. And if 'boring' stocks outperform, as I think they will, boring small-caps will post even greater gains.
Two compelling small-cap companies are National Presto Industries and Lancaster Colony. National Presto makes and sells absorbent products, small appliances, and defense products. And Lancaster Colony sells consumer goods including specialty foods, glassware, and candles. Those products aren't that flashy, but these stocks represent excellent values.
In the last quarter National Presto reported 25% quarterly earning growth, it has a 12.4% profit margin, pays a 1% dividend, and trades with a low P/E of only 11. The stock's beta is also lower then the market, only .79.
Recall that beta is a measure of a stock's volatility relative to the market, which has a beta of one. A beta greater than one means a stock is more volatile then the market, and a beta lower then one means less volatile than the market. For consumer staples I look for a beta below one because it shows me that the stock will likely lag the market on the way up (and the way down) – and truly fit my criteria as a boring stock.
Lancaster Colony recently reported 158% quarterly earnings growth (compared to the year earlier quarter), operates with a 10% profit margin, pays a 2.4% dividend, and has a beta of only .39. Yet the stock is trading with a trailing P/E of only 13. The stock should be trading higher based on historical earnings growth.
I did a little analysis to see how these two stocks have performed since the March lows, and they too posted strong returns. Since March 5, shares of National Presto and Lancaster have increased 26% and 80%, respectively (their average outperforms the large-caps by 22%). Over the same period the Russell 2000 (^RUT) increased 68.5%,
But even more interesting, when investors began dumping everything in the fall of 2008 most stocks plummeted - including boring stocks. But these two small-cap stocks bottomed much earlier, in November of 2008, and were actually rising when the rest of the market was crashing in March of 2009.
Between November 17, 2008 and March 5, 2009, National Presto's stock was flat, while
These results made me sit up straight, and hopefully you too. These small-caps rose when the major indices were still falling, even though small caps typically lead to the down side.
I don't find that performance boring at all. It's time investors establish positions in the overlooked, and underappreciated, small-caps. They are likely to continue to run higher, and may even trade up when most other stocks pull back.
There are many more of these stocks out there in addition to the ones mentioned here. I always enjoy hearing from my readers so please feel free to submit your favorite boring stock and I may feature one next week. My address is mail@bfpnewsletters.com. Have a great weekend.
