Here's the problem that individual investors face when investing in the stock market, in a nutshell:
We all want to beat the market, but the market is dominated by investment banks staffed by legions of professional investors, whose sole purpose in life is to beat the market. Professional investors study stocks 24/7 -- and get paid to do it -- whereas for most individual investors, our stock market research must be crammed into a few hours at the end of a long workday, or on weekends.
How in heaven's name is a poor, lone individual investor to beat those odds?
The answer is to invest in stocks that Wall Street isn't covering. And I mean at all. True, stocks like Apple, IBM, JPMorgan, and Goldman Sachs attract dozens of analysts each. But as data from S&P Global Market Intelligence reveals, dozens of other stocks attract precisely zero analyst coverage. If you focus your research on such stocks, which are not on Wall Street's radar (at least not yet), you can significantly improve your odds of outperforming the professionals.
The first thing to know about investing in under-followed (or in this case, unfollowed) stocks is that your search may lead you into some pretty boring industries, but that's OK if it also leads to exciting profits. I think Muller Industries, which manufactures copper tubes, fittings, and line sets for such exciting industries as water supply, drainage, and waste systems, fits the bill on both fronts.
Priced at just 17.2 times trailing earnings, Mueller stock sells for a big 30% discount to the average P/E on the S&P 500. (Mueller also pays a tidy 1.3% dividend yield, which consumes only 22% of its annual profits, numbers that income investors may find attractive). Because no analysts follow the stock, by definition the company has no published analyst forecast for its growth rate -- which makes calculating a PEG ratio difficult.
Still, Mueller sports an attractive 17.2% return on equity, a statistic some investors will use as a substitute for growth rate in a pinch. And the company's a veritable cash machine, generating positive free cash flow of $135 million over the past 12 months -- 35% ahead of reported earnings.
According to S&P Global, exactly zero analysts follow this company -- yet Mueller's numbers seem attractive enough that perhaps they should.
A second company that's historically gotten short shrift from the Street is gunsmith Sturm, Ruger. For as long as I've been following this company, no analysts have included it in their coverage -- which is actually pretty strange. Rival gunmaker Smith & Wesson, now known as American Outdoor Brands, receives at least modest analyst coverage.
Be that as it may, Ruger is another stock I've always found attractive for its high levels of dividend yield (currently 2.3% versus 1.9% for the average S&P 500 company -- and 0.0% for American Outdoor Brands), and usually high levels of return on equity (depressed below 14% at present, but more commonly in the 20% to 30% range).
Granted, with gun stocks out of favor at present, Ruger's profits are in a slump, and its P/E ratio looks a bit high at 24.1 times earnings. That's still cheaper than average for the S&P, however, and between the company's historically strong ROE and dividend yield and the gun industry's cyclical nature (often performing strongly in years leading up to a presidential election), I wouldn't be a bit surprised to see Sturm, Ruger's sales -- and profits -- perk up strongly in 2020.
Arrow Financial Corporation
Shifting industries sharply here at the end, we come at last to Arrow Financial Corporation -- which, as you may have guessed, is a bank (or more precisely, a bank holding company).
Based in Glens Falls, New York, tiny Arrow sports a market capitalization just above a half-billion dollars, yet it's still a sizable organization with about 40 banking offices and a couple of loan origination offices within its ambit.
Priced at 15 times earnings, Arrow is considerably cheaper than the average S&P stock. Yet its return on equity (13.1%) and return on assets (1.2%) -- both key metrics when valuing banking stocks -- are superior to numbers commonly found in the banking sphere. Bank of America sports an ROE of only 10.4% for example, and Citigroup and Goldman Sachs are both currently at less than 10%. Arrow's ROA is similarly superior to its bigger banking brethren. In fact, among the too-big-to-fail banks, the only one sporting better ROE and ROA numbers than Arrow is JP Morgan itself.
And call me crazy, but I have to imagine that a small banking operation like Arrow has a lot more room to grow than a megabank like JP Morgan. For that reason if no other, I think a high-quality lender like Arrow is worth a look.