Investing in the unloved

The highest returning investments are also the most unloved.

This may sound counter-intuitive at first, but it makes sense when you stand back and think about it.

Great companies, like Google and Apple, that are firing on all cylinders, almost always have share prices that reflects that fact. The very obviousness that such companies are doing well causes investors to flock to those stocks, and hence bid up their shares to very high prices relative to underlying fundamentals. As Warren Buffett puts it, you pay a high price for a cheery consensus. Once everyone loves a stock and has bought it, who is left to buy more?

The companies that are seemingly on the ropes, like Microsoft and Dell (full disclosure: my clients and I both own shares of Microsoft and Dell), on the other hand, have share prices that reflect their tough competitive landscape. Everyone knows that Google is going to crush Microsoft and that Apple is going to crush Dell, so Microsoft and Dell have low share prices relative to their fundamentals. Once everyone who hates a stock has sold it, who is left to sell more?

But, what if what everyone knows to be true isn’t true? What if Microsoft and Dell aren’t completely doomed? What if they do even slightly better than everyone thinks? Then their share prices may perform better than consensus. Actually, once everyone who is going to sell Microsoft and Dell to buy Google and Apple have done so, then there is only one direction share prices can go, and its the opposite of what most people expect.

In my experience, the more hated the company, the more potential for great upside. This isn’t always the case (think: Worldcom, Enron, AIG, Citigroup), but it happens much more frequently than most think.

In fact, I tend to get excited when the consensus comes to such a conclusion. When I tell people I own Comcast (full disclosure: my clients and I own Comcast) and their reaction is, “they are toast, everyone will be watching TV and movies for free over the Internet!”, I just smile and nod. I know that Comcast’s share price reflects this consensus opinion, and that it’s price probably has a lot of upside.

Investing in what is hated is tough. No one will pat you on the back at cocktail parties. But, what would you rather have? Pats on the back, or long run market out-performance? Not everyone agrees with me on this, but it’s an easy choice for me (and I think my clients are happy that I take on that burden for them).

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.