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Sell the Jock, Buy the Geek

I came of age during the '80s. You know, the decade of Gordon Gecko, Bill & Ted, Jeff Spicoli, Mr. Hand, and those spectacular nerds of Lambda Lambda Lambda. If only I had triumphed in my own geekdom during that decade but, alas, I had to wait. Now, 20 years later, with, I hope, my most embarrassing years behind me, I'm on top of the world: I've got a beautiful wife, a great job, and two kids that light up my life. Oh, and did I mention we have a third on the way? Life is good.

Back in junior high, you'd be hard-pressed to invest in the walking embarrassment that I was. But I dare say you'd be feeling pretty good now had you taken the risk on the kid who wore horn-rimmed glasses long after they were cool but long before they became a resurgent retro badge for the tragically hip. The moral? My rise from geekdom is a perfect parallel with some of the stock market's most interesting winners.

Imagine for a minute you're at a cocktail party. You're mingling, having a great time. Suddenly, the conversation turns to stocks. Others around you profess their love for the latest thing.

"Anyone who is anyone owns Electronic Arts' sports games," they say.

"The Street just doesn't get Travelzoo (Nasdaq: TZOO  ) ," they whine.

And XM Satellite Radio? "Its MyFi is the next iPod," proclaims a passerby.

In such company, how would you feel admitting to a sizable position in Kimberly-Clark, maker of the Depends adult diaper? And what of your stake in death-care provider Alderwoods? Your friends would exclaim that they wouldn't be caught, um, dead with stock in that company.

Red-faced and loaded with green
I have to admit right here that I stole the idea for this column from Tom Gardner, co-founder of The Motley Fool and chief analyst for Motley Fool Hidden Gems. He gave a brief presentation recently on where contrarian stock ideas might be found.

At one point, he discussed companies that Wall Street wouldn't touch because they're simply too "silly." The Street often ignores any business that is too embarrassing to explain aloud with pride, walking away from solid businesses that give investors a chance to profit.

Revenge of the stock market nerds
Here's the beauty of the geeks of the market: They can hold their own with the jocks while requiring a lot less risk. To prove it, I created a small, unscientific study. (In other words, I asked my wife -- a serious hipster in her day -- to think of both cool and embarrassing products.)

On the cool ledger: Internet stocks, fashion, wine, electronics, and jewelry. I added satellite radio and video games for good measure. On the geeky side: smoking, incontinence, and odor management. I added pizza arcades, funeral services, cat litter, and grease traps. Stocks were selected for each category: cool stocks vs. geek stocks.

To make the contest even, I gave each team $7,000 to buy $1,000 worth of shares for each stock on Feb. 18, 2004. Shares were bought at the opening price, and all dividends were reinvested. Gains were calculated using yesterday's closing prices. Check out the results:

The Jocks
Company 02/18/04 02/17/05
eBay (Nasdaq: EBAY  ) $1,000 $1,240.41
Polo Ralph Lauren (NYSE: RL  ) $1,000 $1,248.36
Robert Mondavi (Nasdaq: MOND  ) $1,000 $1,526.50
XM Satellite Radio (Nasdaq: XMSR  ) $1,000 $1,502.20
Sony (NYSE: SNE  ) $1,000 $905.86
Electronic Arts (Nasdaq: ERTS  ) $1,000 $1,393.12
Tiffany (NYSE: TIF  ) $1,000 $754.59
Total $7,000 $8,517.04
% Return 22.4%

The Geeks
Company 02/18/04 02/17/05
Alderwoods (Nasdaq: AWGI  ) $1,000 $1,313.04
Altria (NYSE: MO  ) $1,000 $1,237.04
CEC Entertainment (NYSE: CEC  ) $1,000 $1,162.98
Darling International (NYSE: DAR  ) $1,000 $1,479.46
GlaxoSmithKline (NYSE: GSK  ) $1,000 $1,132.89
Kimberly-Clark (NYSE: KMB  ) $1,000 $1,102.91
Oil-Dri (NYSE: ODC  ) $1,000 $1,163.05
Total $7,000 $8,591.37
% Return 22.7%

Lose the braces, kid
Well, lookie there: The geeks managed to barely pull it out despite 50% gains by both XM and winemaker Robert Mondavi. The difference between the groups is stark: The jocks had some serious winners and others, like Tiffany, that pulled a hamstring and left the race. The geeks, on the other hand, all delivered steady returns with only grease-trapper Darling and death-care provider Alderwoods breaking away from the pack. And, most importantly, all of them posted gains. A pair of superstars couldn't compensate for a well-rounded portfolio of embarrassingly profitable stocks.

Dividends made the difference
Not surprisingly, reinvested dividends played a huge factor. More than half of the geeks paid dividends, all with market-beating yields. The jocks paid much less attention to dividends. The three that had payouts -- Polo Ralph Lauren, Sony, and Tiffany -- all featured market-lagging dividends. And two of those lost money even after dividends were reinvested.

None of this is surprising, of course. I've already learned a painful and costly lesson when it comes to dividend growth investing. It doesn't have to be this way for you. A trial to Motley Fool Income Investor, wherein chief analyst Mathew Emmert finds winners among both the jocks and geeks of the market, is free for 30 days. There's never an obligation to buy, only an opportunity to profit from a time-tested strategy that's beaten the market since day one.

This article was originally published on Feb. 18, 2005.

Fool contributorTim Beyersis still a geek at heart. Thankfully, his wife finds that quality charming. Most of the time, that is. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. To see what stocks are in his portfolio check out his Fool profile, which ishere. The Motley Fool isinvestors writing for investors.

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