Tom Gardner, co-founder of The Motley Fool and lead analyst for the Motley FoolHidden Gems newsletter, is attracted to many strange and distasteful businesses. When cornered, he tries to blame these interests on the eminently respectable master investor Peter Lynch. To quote one of Tom's recent articles:
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 is boring or distasteful. You see, the stock market is an enormous auction, and speculators bid up shiny new tech companies -- not those that build funeral homes or handle environmental waste. That makes for low valuations on boring lots, and fantastic profits for long-term investors.
There are several good reasons to invest in the distasteful and boring. For the ghoulish, it gives you an opportunity to spend more time with your interests and, at the same time, profit handsomely. Also, despite their attractive financials, these firms tend to be overlooked by the broader market. So let's take a look at what's happening in the world of the boring and/or distasteful.
Please -- I don't want to even think about it
If you're like most people, you'd prefer to spend as little time as possible thinking about death. How about death as a business proposition? Tom's reference to funeral homes found expression in the recommendation of AlderwoodsGroup (NASDAQ:AWGI) back in 2003, which has been one of the best performers in the Hidden Gems collection of market-beating companies. It is now up 75% in the slightly less than two years since his recommendation and has helped the recommendations in the newsletter (25% average returns) outpace the market (7% S&P 500 returns) over the life of the newsletter.
Alderwoods has appreciated because the market finally caught on to its sterling financials. It even looks like a potentially solid investment today, even after the 75% price appreciation. Debt has been reduced by 50% since 2001, the company has finally begun growing revenue after seeing sales decline for the previous five years, and, most important, management is extremely competent. Whether we want to think about it or not, people are going to keep dying, and this company is poised to service that inevitable need.
Doesn't that business offend half the world's population? Or more?
How about a business that is not only distasteful but also painfully boring? Consider Seaboard (AMEX:SEB), a transportation company that primarily engages in the production and processing of pork (you know, the other white meat) -- a notoriously unacceptable part of the diet of billions of people around the world.
Since the end of March 1992, Seaboard has had virtually identical returns to the slightly better known and ballyhooed Microsoft (NASDAQ:MSFT) -- Seaboard and Microsoft have both produced compound annual returns of 20% in the past 13 and a half years. Put another way, $121 invested in Seaboard 13 years ago would be worth $1,420 today. Why do I pick such obscure figures? Because $121 is what one share of the company went for in 1992, and $1,420 is what a share goes for today.
Seaboard is one of those interesting but rare companies (Berkshire Hathaway and Washington Post (NYSE:WPO) are two others) that never splits its shares, no matter how high the stock price goes. We'll have to wait and see, but Google (NASDAQ:GOOG) is threatening to be another. That's pretty good company for Seaboard.
Seaboard has not been a recommendation of the Hidden Gems newsletter, but it certainly shares a number of traits with the companies that we recommend. It is not closely followed by a bevy of Wall Street analysts (in the sense that it is not followed at all by any Wall Street analyst); it has a very attractive valuation (less than eight times trailing earnings per share), it has a less than $2 billion market cap; and it does not dilute shareholder value through excessive stock option granting. Actually, it does not dilute shareholder value through any share grants -- the company has fewer shares today than were outstanding 15 years ago.
Producing or transporting pork is obviously not going to offend everyone. The larger point is that this is a business that produces world-beating, Microsoft-matching gains, in total silence and virtually unobserved. It's been a great investment for long-term shareholders, despite the lack of attractiveness that many would find in its operations. But, certainly, there are much more objectionable businesses. Such as ...
No, seriously. That's just truly gross.
Let us compare the cuddliest, friendliest company in the world with whatever we might conceive of as one of the least pleasant: Disney (NYSE:DIS) versus the unassumingly named small cap Oil-Dri (NYSE:ODC).
While Disney has a long and proud history of separating parents from their money, the company's recent history has not been rewarding to shareholders. CEO turmoil and changing consumer trends have returned this company's shares to where they were 10 years ago, despite the fact that seemingly every child in America is constantly acquiring more and more Disney paraphernalia. And that's a lot of children.
And yet, there are actually more cats in this country than children, and through Oil-Dri, you've got a nifty way to invest in all those cats. And not in some trendy aspect of cats, like solar-powered cat polishers, or new Atkins Diet cat foods. And actually not in a remotely cuddly way, either. No, instead you can buy the world's premier manufacturer of ... kitty litter. Enough said. Except this: If you had invested in Oil-Dri four years ago, you'd have tripled your money by now.
Find them yourself, or let us help
There are hundreds -- perhaps more than a thousand -- market-beating investments out there that in one way or another will seem too boring or distasteful to the vast majority of investors. We've found a few of them in our Hidden Gems service, and we intend to find a lot more going forward. To see the entire Hidden Gems scorecard, click right here to start a free no-risk 30-day trial.
Bill Barker estimates that Disney has successfully separated him from 50% of all of his income since the birth of his firstborn, though that has rapidly accelerated to the 90% to 130% range now that he has three children. He does not own shares of Disney, but does own shares of Berkshire Hathaway. He does not own stakes in any other companies mentioned in this article. Check out the Fool's strict disclosure policy.
