A Small Cap for the Long Run

A few months back, I recommended United Fire & Casualty (Nasdaq: UFCS  ) to subscribers of my Hidden Gems service. United Fire & Casualty possesses some of master investor Peter Lynch's core investment characteristics. Who's Peter Lynch? He was the manager of Fidelity Magellan, a fund that under his stewardship returned 29% per year for 13 years -- turning a $10,000 investment into a nearly $300,000 fortune.

Celebrate boring businesses
One of the traits Lynch looked for in companies -- and something we look for at Hidden Gems -- is that they are in a line of work that is boring or distasteful. You see, the stock market is an enormous auction, and speculators bid up shiny new tech companies -- not those that build funeral homes or handle environmental waste. That makes for low valuations on boring lots, and fantastic profits for long-term investors. United Fire & Casualty sells insurance, and folks generally don't get too fired up about owning insurers.

Know your CEO
We also look for management teams that have been in the game since the beginning. In today's era, CEOs stay at the helm less than five years (on average), sell options at the end of every year, and hightail it to Bora-Bora when their tenure is up. They live happily ever after without ever creating lasting value in the business that made them rich. Therefore, I scour the market for managers who put their reputations and compensation packages on the line for very long periods of time. These superior leadership teams recognize that the biggest gains in the market are made over decades because of the power of compounding.

When we find these factors in tandem at Hidden Gems, we sit up and take notice.

United Fire & Casualty was founded in 1938 by Scott McIntyre. He turned the company over to his son, who continues to own a substantial stake in the business he's been with since 1958. The company's stock is up 160 times since 1972, and it's up 25% for Hidden Gems in the past four months. Since we're buy-and-hold investors, we're not even satisfied with that 25%. We believe Mr. McIntyre will reward us even more.

Foolish final thoughts
Boring businesses can lead to long-term outperformance for opportunistic investors. Johnson Controls, anyone? The facility controls company is up nearly 20 times since 1991. If I can find a boring business with dedicated and tenured management, my interest is piqued.

Founders and CEOs with large personal stakes in the success of their company have spurred many of the market's biggest success stories. Just take a look at the performance of Steve Jobs at Apple (Nasdaq: AAPL  ) , Rupert Murdoch at News Corp. (NYSE: NWS  ) , Phil Knight at Nike (NYSE: NKE  ) , John Mackey at Whole Foods (Nasdaq: WFMI  ) , Larry Page and Sergey Brin at Google (Nasdaq: GOOG  ) , or the late Katharine Graham at The Washington Post (NYSE: WPO  ) .

These are exactly the sort of businesses and companies we look for at Hidden Gems, and we're confident that we can find a lot of them -- our small-cap portfolio is already beating the market by 20 percentage points. If you'd like to take a free one-month trial to look at the 48 we've already found and interact with investors who are actively following these companies, then click here. You have no obligation to subscribe.

Tom Gardner is the lead analyst of Motley Fool Hidden Gems and co-founder of The Motley Fool. Tom owns none of the companies mentioned in this article. The Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 496696, ~/Articles/ArticleHandler.aspx, 12/19/2014 5:49:05 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement