Exciting Growth From Unexciting Stocks

Let's face it -- we generally prefer exciting to nonexciting. We watch Die Hard 17 instead of The Secret Life of Fungi. We dream of vacations in Hawaii instead of North Dakota. When looking for investments for our portfolios, we gravitate toward companies that are on a tear, ones with exciting stories and prospects, instead of firms that have been quietly and profitably cranking out widgets for 77 years.

But, you know, there are some fascinating aspects of fungi. (Single-celled slime molds, for example, have been known to work their way through a maze in order to reach food at the end.) And North Dakota features a lot of breathtaking scenery, including farmland and wilderness. And seemingly boring stocks can actually take your breath away, if you give them a chance.

Heart-pounding investments
But let's get back to those exciting investments for a second. I know all about them. I invested in Intuitive Surgical in 2006, and watched it quickly triple in value in just over a year, going from around $100 to more than $300. It's a very exciting company, and I still have great hopes for it, but alas, it dropped to below $100 recently before recovering to the mid $150s. It's not for the faint of heart.

Similarly, I watched a $3,000 investment turn into more than $200,000 some years ago, following a recommendation by Fool co-founders David and Tom Gardner. That stock, too, ultimately retreated considerably, and those who weren't on the ball lost a lot of ground.

Powerful tortoises
Meanwhile, if you tear your attention away from the flash and sizzle of hot stocks, you'll find that there are lots of sleepy companies quietly churning out profits year after year, and making people rich in the process. (And our current economic environment presents the best kind of opportunity to invest in them.)

Think about Warren Buffett, for example. His Berkshire Hathaway has handily outperformed most stocks over decades. How has he done it? Not with companies like Intuitive Surgical, but largely with insurance, and with a portfolio of stock in companies such as banks, newspapers, railroads, and consumer products makers -- Coca-Cola, for example, and Union Pacific.

I'm as guilty as the next investor of thinking that I'll get the biggest bang for my portfolio from exciting stocks with stories of possible great growth right around the corner. But if you look over lists of companies that have performed spectacularly over the past decade, and decades, they sport a whole lot of seemingly boring enterprises. Here are some I dug up when looking for outstanding long-term performers:

Data: Morningstar.com.

We're not used to thinking about railroads or agriculture as big profit generators, but we should think again. Those 10-year averages above may not knock your socks off, considering that the market's historic long-term average is around 10%, but they are exceptionally impressive given that the market actually lost ground during the past decade. If you earned a 15% average return during the period, it would have turned a $25,000 nest egg into a $100,000 omelet.

Prospecting in coma-land
So, in this recessed market, which some are calling the best opportunity in 35 years, where might you find such outperformers for your portfolio?

Well, you can start by training yourself to reconsider companies you quickly pass over in your reading, as your eyes glaze over. When you see lists of great performers, look beyond the hot, familiar names. Some may indeed have great three- or five-, or even 10-year records, but if they're dependent on consumer tastes or are in otherwise fickle industries, know that those can change. Crocs, for example, was a stock on fire for a while, but it has recently burned out.

With contenders, check out their long-term records. Look for debt under control and robust profit margins. Look for sustained growth, with revenue and earnings growing faster than inventories and accounts receivable. Look for a lot of promise, as well as past performance.

If you want to do less work, you can look for recommendations of promising stocks, reminding yourself to not give short shrift to the wallflowers on the lists. Our Motley Fool Stock Advisor newsletter, for example, led by David and Tom Gardner, has racked up an impressive record, with its picks outperforming the market, on average, by a whopping 40 percentage points. (Try it for free and you can see all the recommendations.)

An interesting thing about Stock Advisor is that while David often recommends companies with some razzle-dazzle to them (video game makers, online retailers), Tom often highlights more boring enterprises -- such as those specializing in clinical laboratories, ovens, credit ratings, and uniforms. Their results show that some razzle-dazzlers can deliver boring results, while some boring companies can end up razzle-dazzling us.

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This article was originally published April 28, 2009. It has been updated.

Longtime Fool contributor Selena Maranjian owns shares of Berkshire Hathaway, Coca-Cola, and Intuitive Surgical. Intuitive Surgical is a Motley Fool Rule Breakers recommendation. Berkshire Hathaway, Stryker, and Coca-Cola are Inside Value picks. Berkshire Hathaway is also a Stock Advisor choice. Coca-Cola is also an Income Investor pick. The Fool owns shares of Berkshire Hathaway and Stryker. The Motley Fool is Fools writing for Fools.