Have you ever listened to an interview with a supermodel?
And no, I don't mean watched an interview, I mean listened to one. Almost invariably, the supermodel recalls her awkward years in high school. Occasionally, the years were so awkward she didn't get asked to prom.
It wouldn't have taken a Casanova to score a date with a supermodel back then. Years later, even Casanovas get turned down.
It's this same kind of bad timing that can kill your portfolio's returns.
The supermodel stocks
Since my job is analyzing and writing about stocks, I talk to a lot of people about stocks -- from folks who can barely spell the ticker symbol to folks who have multi-tab spreadsheets on each company they follow. But this motley assortment has one thing in common.
Everybody, and I mean everybody, has an opinion on Apple
The problem is that they're kinda late to the party. Wall Street is all over these companies. Apple has 44 analysts covering it, Wal-Mart has 26 and Google has 38.
To be clear, those analysts cover these companies and their industry competitors as a full-time job -- they're laser-focused on knowing everything they can about just a few companies. While you're making toast in the morning, they're updating proprietary models. When you're meeting with your boss, they're meeting with CEOs. Printing out one of their research reports will get you on the Sierra Club's watchlist.
You get the idea.
Wall Street's weakness
Now, that doesn't mean you can't make money on these stocks. Wall Street is known for following the herd and thinking in quarters instead of years. You can surely exploit these Wall Street weaknesses. Heck, that's what we try to do every day at the Motley Fool.
However, focusing just on the big guys misses Wall Street's biggest blind spot. Analysts are very well compensated, so covering the little guys -- the ones fewer people have heard of -- just doesn't make sense from a cost-benefit perspective.
And that leads to opportunity for the individual investor (read: you).
Just look at the differences in the amount of coverage the following stocks receive:
|
Small, Underfollowed Stock |
No. of Analysts |
Well-known Stock |
No. of Analysts |
|---|---|---|---|
|
inVentiv Health |
4 |
United Health |
22 |
|
Ameristar Casinos |
12 |
MGM
Las Vegas Sands |
23 18 |
|
Dawson Geophysical |
3 |
ExxonMobil Schlumberger |
20 28 |
Twice as many professional analysts follow the Vegas lights of MGM and Las Vegas Sands than Ameristar, which stays in the shadows by operating in places like St. Louis and Kansas City. It's even more lopsided for Dawson Geophysical and inVentiv Health.
Keep your eyes open
Now, just because a company is underfollowed doesn't mean it's a diamond in the rough just waiting to be discovered. In fact, there are plenty more bad, unfollowed companies than good.
The trick is to do the work that Wall Street either can't or hasn't yet.
The team at Motley Fool Hidden Gems recommends looking for the following characteristics to separate the gems from the garbage:
- Strong balance sheets
- Strong free cash flow
- Sustainable competitive advantage
- Smart management that's properly incented
After identifying these companies, the next step is buying in at a good price.
The Hidden Gems team does this for the world to see. They search for the small, ignored stocks that will be tomorrow's supermodel stocks; then, they invest the Motley Fool's own cash in a real-money portfolio. Each month, they identify two new portfolio candidates, but they don't buy shares until the opportunity for returns gets sufficiently juicy. So far, inVentiv Health, Ameristar, and Dawson Geophysical haven't made the cut. To see the companies that have, click here for a free 30-day trial.
Anand Chokkavelu does not own shares in the companies mentioned in this article. He wonders: If your next-door neighbor were a supermodel, would she have supermodel looks or girl-next-door looks? Ameristar Casinos, Dawson Geophysical, and inVentiv Health are Motley Fool Hidden Gems picks. Google is a Rule Breakers recommendation. Apple, UnitedHealth Group, and inVentiv Health are Stock Advisor selections. UnitedHealth Group and Wal-Mart Stores are Inside Value selections. The Fool owns shares of inVentiv Health and Unitedhealth Group and has a disclosure policy.
