These Stocks Aren't Cool, and That's Pretty Cool
Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As many investors know, the greatest record in the history of the mutual fund industry belongs to a man named Peter Lynch. He managed the Fidelity Magellan fund, which between 1977 and 1990 grew at a compound annual growth rate of 29.2%. Or in other words each dollar invested with Lynch in 1977 grew to nearly $28 13 years later.
Peter did a great service to the investing community when he published One Up on Wall Street. The book outlines Lynch's philosophy on investing and is an absolute must-read for anyone thinking about picking their own stocks.
Chapter 8 of the book is entitled "The Perfect Stock, What a Deal!" In this chapter Lynch lays out the 13 most important favorable attributes any stock can have. Numbers one and two Lynch's list are as follows:
1) It sounds dull - or, even better, ridiculous. To quote Lynch "The perfect company has to be engaged in a perfectly simple business, and the perfectly simple business ought to have a perfectly boring name. The more boring it is, the better."
2) It does something dull. Lynch said he gets even more excited when a company with a boring name also does something boring.
Two of the top traits the world's greatest mutual fund manager thinks a stock can have are a boring name and a boring business. The following three companies are engaged in boring, uncool businesses. But as Lynch points out, great investing opportunities often arise in the dullest of companies.
Ah is there anything quite as boring as sand? US Silica Holdings (NYSE: SLCA) is the second largest domestic producer of commercial silica. Its sand is used in a variety of industries including glass making and chemical manufacturing.
But the company's fastest growing segment is oil and gas proppants, materials meant to keep a fracking fracture open. Selling sand to frackers is what that segment does. The company expects demand for commercial silica in the hydraulic fracturing market to increase by 8% annually through 2016.
2012 sales of $441.9 million and 2012 net income of $79.2 million represent year over year increases of 50% and 162% respectively. That's really fracking good.
Cal-Maine Foods (NASDAQ: CALM) is the largest producer of shell eggs in the United States. In 2012 the company sold approximately one-fifth of the shell eggs consumed in this country. It only has one segment because eggs are the only product this company makes. A company that's boring in the best of ways.
The company currently yields 3.4% with a 32% payout ratio. Distributions have grown at a 10 year CAGR of 13%. Although distributions have been somewhat sporadic, so that 3.4% is certainly not a sure thing.
It has $289 million dollars worth of working capital and shareholder's equity of $521.3 million. Average net income for the past three years is equal to $72.8 million.
This all from a company the market is offering to sell to you for $1.2 billion (conveniently that is also the current market price for US Silica Holdings).
Peter mentioned this company by name
When Lynch spoke about companies having boring names, he explicitly said Automatic Data Processing (NASDAQ: ADP) was a good place to start. Granted he wrote One Up on Wall Street in 1989, so does this company with the most boring of names still present an opportunity for investors?
ADP provides business outsourcing solutions. The company's solutions help companies manage payrolls and HR departments among other things.
Right now ADP yields 2.4% with a 56% payout ratio. In the past 5 years dividends have grown at a CAGR of 8.7%. The company began paying a dividend in 1983. Over the past 20 years the company has only neglected to pay a dividend in two quarters.
Net income from continuing operations has grown at a steady rate. During the five year period of 2008-2012 average net income from continuing ops was $1.27 billion. In the 2003-2007 period the average figure was $831.9 billion.
Anyone who wants to take a stab at picking their own stocks owes it to themselves to read Peter Lynch's wonderful book One Up on Wall Street. Contained within its pages is the investing philosophy of a true master.
Lynch loved companies that had a name, or operated in a line of business, that was boring. That's because the market often fails to take notice of boring companies for a long time.
After all why should boring companies even be on the radar of the big shot institutional investors when they could be following the most popular companies on the market such as Google or Apple?
Not to say that Google and Apple are bad investments. It's just that in the world of investing you will find more promising opportunities among boring, unknown companies than you will among flashy and exciting ones.
Fool blogger Ryan Palmer has no position in any of the stocks mentioned. The Motley Fool recommends Automatic Data Processing. The Motley Fool owns shares of U.S. Silica Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!