Peter Lynch -- a legend in the investing community for his tenure managing the Fidelity Magellan fund -- laid out a set of ground rules he called "Peter's Principles" in his book Beating the Street. One of those principles was "When even the analysts are bored, it's time to start buying." Simple and straightforward companies are the kind Wall Street commonly overlooks, but they can be wonderful additions to your portfolio.
In the spirit of Peter Lynch's mantra, we asked three of our contributors to each highlight a stock they view as overlooked. Here's why they picked Mattel (MAT +1.27%), WD-40 Company (WDFC +5.31%), and Autoliv (ALV +6.82%).
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Plenty of room to play
Rich Duprey (Mattel): You may have missed it, but Mattel's business is doing a lot better than you think. Sure, there's some lingering (and well-founded) concern about the loss of licensing rights of Disney's (DIS +2.26%) Frozen and Princess doll lines last year to rival Hasbro (HAS +4.08%), but the toymaker has set about to improve its remaining brands while entering new markets.
The efforts seem to be having some early success. Excluding the Princess dolls, Mattel's worldwide sales were up by high single-digit percentage rates when factoring in currency fluctuations, with almost all divisions -- including its aging Barbie brand -- showing growth. Fisher-Price saw currency-neutral gains of 6%; Hot Wheels and Matchbox were up 11%; Barbie was 9% higher; and entertainment was up 16% year over year. Even the American Girl brand had largely stabilized.
Overall sales were still flat absent the effects of foreign exchange rates. That had to do with the loss of Disney, and it's clear Mattel is trying to make up for it elsewhere. Barbie and Fisher-Price comprise 58% of the toymaker's revenue, so their ability to continue growing is key. The huge worldwide opening of the latest Fast & Furious movie this weekend -- it pulled in $532 million, beating the 2015 Star Wars opening -- bodes well as Mattel has a licensing deal with it. Other movie properties like Wonder Woman, Cars 3, and a Barbie movie scheduled for 2018 (though it's unlikely star Amy Schumer had to back out just last month due to a scheduling conflict) should provide a boost too.
The strong dollar, rising fuel costs, some global economic concerns, and a few more hot spots still weigh on the toymaker's upcoming results, but Barbie in particular looks like it's back on track. Mattel has a lot of room to grow to its 2011 peak, and it would be a mistake to continue overlooking this stock.
Boring & beautiful
Tyler Crowe (WD-40 Company): You'll be hard-pressed to find a company that is as uneventful as WD-40, which makes its stock easy to overlook. But this is the kind of company that long-term investors would want to own for decades.
The iconic blue and yellow can is pretty much ubiquitous in households and in maintenance shops. It's estimated that more than 80% of all households in the U.S. have a can of WD-40 on a shelf. Management has used that brand to diversify into a wider range of specialty products including lawn and garden care, degreasers, and general maintenance products. On top of that, the company owns a suite of well-known maintenance product brands such as 3-in-One oil, 2000 Flushes cleaning product, Spot Shot stain remover, and Lava soap. The real workhorse for the company, of course, is the WD-40 brand, which makes up more than 90% of sales.
Typically, selling these kinds of products would be a low-margin affair, but WD-40 Company is unique in that it farms out all its manufacturing to third parties. This makes its business extremely asset-light, and translates to low capital-spending needs and high rates of return. For the past decade, WD-40 has generated better-than-10% returns on invested capital. Those high rates of return have resulted in a dividend that has grown 7% annually, and the company has reduced its share count by 18%.
The company's activity isn't front-page news: Management avoids splashy acquisitions and certainly has a "keep your head down" mentality that makes this stock really fly under the radar. For investors who want to add a stock to their portfolio that will likely churn out strong returns year in and year out, though, WD-40 Company is hard to beat.
A well-positioned supplier
Daniel Miller (Autoliv): When it comes to the automotive industry, many investors have turned their attention to major automakers as the North American new-vehicle market plateaus -- and that's understandable. However, one automotive stock that continues to be overlooked and could be a winner for investors is Autoliv.
Autoliv is a safety technology company within the world of automotive occupant safety. It was the first company to introduce the two- and three-point seat belt system, as well as airbags for front and side impacts. The company has a presence in more than 27 countries, and its products can be found in more than 1,300 car models across 100 different car brands.
Autoliv is poised to grow its top and bottom line as demand for vehicle safety content increases globally. The government's New Car Assessment Program has required automakers to use more active safety features to be considered for a five-star crash test rating. Active safety technology is essentially radar and other vision or detection capabilities, and those products are only going to be more in demand as the industry shifts toward autonomous vehicles. In addition to standards requiring more active technology, Autoliv should also benefit as emerging markets around the world become more developed. Historically speaking, when a country and its citizens become wealthier, demand for better vehicle safety rises.
There are also advantages to Autoliv's business that benefit investors, such as high customer switching costs. It takes a lot of time to develop a vehicle from the ground up, and once it's established and in production, switching safety products is undesirable and can be costly. Autoliv also has cost advantages with operations in low-cost regions around the globe. The company is well-positioned to benefit from rising global demand for safety technology and has competitive advantages, but Autoliv stock is overlooked because it's a part of a capital-intensive and cyclical industry -- and that isn't changing anytime soon.
