A Small Cap for the Long Run

A few months back, I recommended Columbia Sportswear to subscribers of my Motley Fool Hidden Gems service. Columbia 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's boring or distasteful. You see, the stock market is an enormous auction, and speculators bid up shiny new tech companies -- not companies that build funeral homes or handle environmental waste. That makes for low valuations on boring lots, and fantastic profits for long-term investors. Columbia, for example, sells shoes, socks, and jackets.

Know your CEO
We also look for management teams that have long tenures and own a significant share of their businesses. 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. 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.

Columbia Sportswear was founded in 1938 by Paul Lamfrom, and the company has been run by the family ever since. Today, Paul's daughter Gertrude Boyle serves as chairman of the board; her son Timothy, Paul's grandson, is CEO. Together, they own more than half of Columbia Sportswear -- holdings worth nearly $1 billion.

Foolish final thoughts
Founders and CEOs with large personal stakes in the success of their boring businesses have spurred many of the market's biggest success stories. And as my cousin said recently -- he and my uncle manage a few billion dollars out of their value firm in Pennsylvania and have outstanding 25-year returns -- "We have come to the realization over time that insider ownership is one of the most important indicators -- maybe the most important -- of sustained success in the public markets."

For proof, just take a look at these founders and CEOs with more than 10 years' experience at their less-than-"hot" companies:

Company

Person

Industry

Ownership
Stake

10-Year Compound Annual Growth Rate

Columbia Sportswear

Gertrude and Timothy Boyle

Apparel

56%

14.8%*

Scotts Miracle-Gro (NYSE: SMG  )

James Hagedorn

Agricultural Chemicals

31.6%

16.4%

Bank of the Ozarks (Nasdaq: OZRK  )

George Gleason

Financial

24.6%

24%

RelivInternational (Nasdaq: RELV  )

Robert Montgomery

Personal Products

22.4%

15.5%

Raymond James Financial (NYSE: RJF  )

Thomas James

Financial

13.5%

22.2%

Airgas (NYSE: ARG  )

Peter McCausland

Industrial Gases

13%

6%

LeucadiaNational (NYSE: LUK  )

Ian Cumming

Multi-Sector Holdings

11.7%

32.3%

J&J Snack Foods (Nasdaq: JJSF  )

Gerald Shreiber

Packaged Foods

28%

17.2%

*Since 1998 IPO.

This method is just one way we identify promising small companies at Motley Fool Hidden Gems. To date, our small-cap picks are up an average of 38%, vs. 8% for the S&P 500.

If you'd like to learn more about our service, click here to join me, my team, and tens of thousands of other small-cap investors in our community, free for 30 days.

This article was originally published on Aug. 11, 2005. It has been updated.

Tom Gardner, co-founder of The Motley Fool, is the lead analyst of Motley Fool Hidden Gems. Tom does not own shares of any company mentioned in this article. The Fool has a disclosure policy.


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