My colleague Bill Mann, a darn good investor, once told a crowd of us that his secret was this: "I look for mediocrity. Then, I buy it."
I'm not sure anyone believed him except for those of us who follow his portfolio, which tends to be full of stuff like Denny's (NASDAQ:DENN) or struggling materials producers with Bill Mann nicknames like "dog-[naughty word] steel." (The naughty word in there rhymes with flap.)
What he means, of course, is that companies doing a decent job, but not a great one, tend to get little attention from Mr. Market, and it's that lack of buzz that offers us good prices on the stocks. The market eventually figures out what such companies are worth, and when it gets it right, or maybe even gets a bit overexcited, we can sell what we've held for a nice gain.
That was precisely the case earlier in the year for grocer Arden Group (NASDAQ:ARDNA), which traded down to below $80 a share during the past 12 months. I remember it well, because I committed the unforgivable sin of sitting on my hands and doing nothing, even though I suspected the shares were worth more like $115 each.
Since then, they've risen to $105, and there's not a whole lot of whiz-bang to explain why. Recent earnings prove that. Take a look for yourself at the sliced 'n' diced figures in Fool by Numbers. There's just nothing sexy there.
Revenues were up 2.4%, and earnings per share, buoyed by share buybacks, moved up 7.5%. Free cash flow looks like it took a hit based on timing of tax payments as compared to last year, but free cash flow is often lumpy for Arden, depending on whether or not stores need fix-ups.
So why does all the love in the grocery space go to outfits like newcomers Whole Foods Market (NASDAQ:WFMI) and Wild Oats Markets (NASDAQ:OATS), or old-guard firms such as Albertson's (NYSE:ABS-P) and Safeway (NYSE:SWY)? Because they're big and/or hot -- Arden Group's neither.
Therein lies the secret to the utterly boring story of a potential 40% gainer during the past 12 months, a capital increase that absolutely whomps the broader market's flatline. Take a look for yourself. (Arden's return beats the heck out of all those peers I mentioned too, with the exception of Albertson's.)
That's the lesson of mediocrity, folks. I suggest you add some of it to your portfolio. Just make sure you pay the right price.
Arden Group's under-the-radar size and strong cash flow have earned it a spot on the Motley Fool Hidden Gems Watch List. To take a free look at companies that have made the cut and become official recommendations, click here . Whole Foods is a Motley Fool Stock Advisor pick, and you can try that service by clicking here.
Seth Jayson has learned to love boring. At the time of publication, he had shares of Arden Group, but no positions in any other firm mentioned. View his stock holdings and Fool profile here. Fool rules are here.
