What the Financial Media Don't Want You to Know

I'm going to let you in on an industry secret. It's going to explain why the stock market -- even in this age of unmatched access to information -- is a self-perpetuating machine for mediocrity.

Now, even though this is an industry secret, you've probably picked up on it. In fact, we get emails all the time from frustrated readers who want it to stop. And we're not even the worst offenders.

The two words you'll never forget
Although the Internet has the capacity to cover every single publicly traded stock, only a handful get consistent media coverage. The stocks that earn this special status do so for a very clear reason: There are enough people out there who want to read about them.

In industry-speak, these are "hot tickers."

Hot what?
They're the only stocks out that can generate enough page views to support an ad-based financial media model. And they tend to be large, technology-focused companies. That's why you'll regularly find stories -- often unrelated -- about certain companies from multiple sources, including MarketWatch, paidcontent.org, the Associated Press, Reuters, TheStreet.com, BusinessWeek, TechTicker, Fortune, Barron's, Investor's Business Daily, and even The Motley Fool. We're talking about big names such as Microsoft (Nasdaq: MSFT  ) , Google (Nasdaq: GOOG  ) , and Intel (Nasdaq: INTC  ) , and they pop up even on slow news days. This phenomenon also explains why stocks with cult followings, such as Sirius Satellite Radio (Nasdaq: SIRI  ) and XM Satellite Radio (Nasdaq: XMSR  ) , are among the most widely reported-on stocks on the market, despite their relative small size and downright paltry recent performance.

It's a vicious cycle. You want to read about these stocks, so we write about them, and because we write about them, more and more people want to read about them. Yet although big tech companies can be fun to follow, they are not likely to earn you outsized returns.

And I'll back up that claim with numbers
There's a famous chart from Fama and French data that looks something like this:

 

Value

Growth

Large Cap

12.4%

9.6%

Small Cap

15.4%

9.2%

This chart is telling you that from 1927 to 2004, large-cap growth stocks (the hot tickers) underperformed small-cap value stocks (the stocks you've never heard of) by nearly 6 percentage points annually.

Part of the reason is the big stocks are overcovered by the media and analysts and therefore overbought by investors. And because they're overbought, they remain overcovered. This is the self-perpetuating machine for mediocrity that I referred to earlier.

But you can break from this cycle by being willing to look where others won't.

The flipside
See, even though the system overcovers certain stocks (and renders them pretty efficiently priced), tiny companies such as Brazil Fast Food, U.S. Home Systems (Nasdaq: USHS  ) , and Aladdin Knowledge Systems (Nasdaq: ALDN  ) can go totally uncovered. In fact, when you quote these names, you generally won't find anything more than press releases, even after earnings or acquisitions are announced.

As a result, no one knows these stocks are out there. Days can pass without a single share of Brazil Fast Food trading hands. Yet if we're willing to study these companies closely, it turns out that underfollowed stocks like these are the ones we should be buying!

Because they will help you make more money
Just last week, Mark Hulbert reported on a new study in The New York Times that found that from 1962 to 2003, stocks that could go at least a day without trading any shares -- like Brazil Fast Food -- outperformed stocks that traded every day by more than 8 percentage points annually. And that was the case even though the "neglected stock portfolio," as researchers Athanasios Bolmatis and Evangelos Sekeris called it, contains "a disproportionate number of stocks that underperform the market by a dramatic margin."

In other words, even though this part of the market can be an opaque niche, there are multibaggers there for the taking by investors willing to do their own legwork.

But few people are
So while most investors will stick and be stuck with the hot tickers, if you want to outperform the market, you need to start following underfollowed stocks. That's what we do at our Motley Fool Hidden Gems small-cap research service, where I focus my time exclusively on companies with market caps of less than $200 million.

You won't find our micro-cap research when you quote your stocks, because there aren't enough people who care to make it a viable business model. But you can read all of our research and recommendations by joining Hidden Gems free for 30 days.

Click here for more information.

Tim Hanson owns shares of U.S. Home Systems and Aladdin Knowledge Systems. Aladdin Knowledge Systems is a Motley Fool Hidden Gems recommendation. U.S. Home Systems is a Hidden Gems PayDirt recommendations. Microsoft and Intel are Inside Value picks. Google is a Rule Breakers selection. The Fool's disclosure policy humbly asks the market to start going back up again.


Read/Post Comments (10) | Recommend This Article (55)

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.

  • Report this Comment On July 03, 2008, at 10:14 AM, SiriusInvestor09 wrote:

    To prove the authors point, the only reason why I even skimed this article is because I recieved it on my Sirius newsfeed. How ironic? But here's to the best cult: the Sirius sat. radio investors, with the most passionate investors, and recently bullied stock on the street.

  • Report this Comment On July 03, 2008, at 2:40 PM, KWT8011 wrote:

    What they don't want you to know.. Tim Hanson, are you moonlighting for Kevin Trudeau???

  • Report this Comment On July 03, 2008, at 3:18 PM, gghillx wrote:

    Why should you be outraged -- or pretend to be -- that major financial media report on stocks that are widely held or of wider interest than others?

    A little less faux attitude might make your sales pitch for Hidden Gems more credible. There is certainly a role for you to play finding stocks that may be overlooked.

    Disclosure: I work for one of those media outlets you listed.

  • Report this Comment On July 03, 2008, at 3:47 PM, TMFMmbop wrote:

    I don't begrudge anyone for making sure "hot" tickers get into articles. As someone has pointed out, we do this at the Fool. The economics of the business are such that you cannot pay people to cover small and OTC companies. The investment justification just isn't there.

    That said, if you're an investor, I believe you should be looking hard at things that no one else is looking at. After all, if there are fewer opinions being registered on a stock, that means that the wisdom of crowds has not yet been able to average that stock's price close to fair value.

    As for Sirius, it proves this point. There's nothing out there about Sirius that investors don't know. Thus, it comes down to whether you believe the story or not. For a company like BOBS, the market doesn't know what's going on. Thus, you can gain an informational advantage in the stock...which is a rarity these days.

    Glad this article is generating some comments. I'd hoped it would.

    Tim Hanson

  • Report this Comment On July 03, 2008, at 6:17 PM, aw4golf wrote:

    Agree with your article!

    But please do not start writing about GE, I like where the stock price is because I can afford to buy more. Last year GE paid me $6,935.40 in dividends and will do so again this year, way more than I made in any of the "story stocks".

    Right now if CNBC was not owned by GE, nobody would be reporting or writing about GE. After all, it is just an "old story" stock that just continues to make money.

    Many of the "Hidden Gems" stocks in my account now show up with just a tracking number, no symbol, the number of shares, and market value of zero (0).

    I like Gems that are not hidden, you know, the ones that are right there in front of us delivering money to my account year after year.

    So please, don't start "discovering and writing" about GE.

    Thank you in advance!

    AL

  • Report this Comment On July 04, 2008, at 6:26 PM, Matt8265 wrote:

    Did I hear somebody say... WTF's going on with a Sirius merger now at day 510 (since announcement)..... well... here's my .02565

    To Wit;

    Commissioner Tate plays Kathy Bates - In the movie "Misery"

    Remember the movie "Misery" where Kathy Bates "Hobbles" James Caan so that she can keep him incapacitate just enough to enjoy his company, but to never see him become healthy enough to leave or defend himself? Every time the poor bastard would start to heal, here comes Kathy with a sledgehammer to crush his ankles.

    See an analogy here?

    The FCC five are not stupid people, in fact, if you look at their writings you'll discover that they are highly intelligent and articulate people. I've read most of their individual works and rulings. However, apparently something is horribly amiss as past history has shown that the average merger processes in less than 9 months .. So why are we here nearing 18 months with two quickly fading companies whose stock is valued by the leading financial house in the ENTIRE world as being worth less than a Big Mac or a quart and a half of gasoline?

    Why ... Because the FCC knows very well that this merger is necessary for the proliferation ... no, existence of satrad. They know these companies are deeply in dept and can't sustain themselves for another half year, they know people love the service, they know satrad provides a great pubic service, they know the NAB has had a monopoly for years treating consumers like sheep.... and YOU know all these things are true!

    But as Mr. Addlestein's writing hint (and I like him as a person and Commissioner ... he'd make a great future Chairman IMO) the FCC has allowed itself to be controlled by Congress... and Congress has allowed itself to be controlled by the NAB... and the NAB's intent is to destroy Satrad for their own financial benefit.

    The FCC has fully relinquished its autonomy under Kevin Martin.

    So what is a puppet FCC organization to do? Torn by the dictates of their puppet masters yet intelligent and moral people who realize that they are not doing their duty to consumers or the technology by nixing this arrangement.

    They "Hobble" Sirius and XM with delay via meetings and lobbyists, and meetings and ex partes and people looking for handouts ... very much like Kathy hobbled James. They take XM and Sirius within inches of their lives. This way, when they are finally tired of the game, and primarily their careers are assured, they can have it as close to "both ways" as possible. Please their Congressional puppet masters and (lastly) hopefully the public.

    This is exactly what they have done!

    Let's hope it's not too late.

    Go Jimmy Go!

  • Report this Comment On July 07, 2008, at 9:37 AM, WPThatcher wrote:

    The chart from French and Fama is very interesting, but I would like to know how they define small cap v. large cap, and growth v. value. That would make all the difference.

  • Report this Comment On July 08, 2008, at 6:09 PM, Seanakin wrote:

    The whole "hot tickers" story sounds like one more correlation between individual investing and fantasy sports, i.e. for years I was frustrated by the lack of coverage on minor leaguers while all the ubiquitous media sources kept devoting paragraphs galore to the big-name players already known to everyone. Not exactly helpful when you're looking for an edge...which is why I tend to ignore the hot stocks touted ad nauseam on TV. That, and they distract my attention from all the money honey eye candy.

  • Report this Comment On July 10, 2008, at 5:37 PM, whoareyoukidding wrote:

    So the stocks with less publicity are supposed to perform better than those with more publicity... Well, I guess your pick for the next Berkshire Hathaway must be right because it's only plastered everywhere on the internet.

  • Report this Comment On July 13, 2008, at 10:15 AM, whirlybrd wrote:

    "So the stocks with less publicity are supposed to perform better than those with more publicity... Well, I guess your pick for the next Berkshire Hathaway must be right because it's only plastered everywhere on the internet."

    That's funny. The whole thread made me chuckle. I do agree in this: the very fact that the Motley Fool recommends a stock, that fact alone will drive the price up artificially.

    I take it all with a pinch of salt, and do my own research. The value of MF is people's dry comments, the forums, and outspoken jibes such as contained here. Not... their actual picks....!

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