Which would you rather own, a Toyota Corolla or a Ferrari Enzo? While they both get you around town, the latter has many expectations built in. It causes a lot of talk, especially when it ends up in pieces after a crash at more than 162 mph. The former is boring; the latter is sexy. At least, it was before that crash.
Companies, too, can be boring or sexy. A large part of this distinction comes from what is claimed for them, such as a world-changing technology. Sexy stocks, to me, have high expectations. Voice over Internet protocol fits into this category, for instance. Internet companies did in the 1990s. On the other hand, Coca-Cola (NYSE:KO) doesn't build up high expectations claiming to change the world with a new beverage. OK, maybe it did with that New Coke fiasco...
One thing that clues me in to boring versus sexy is how often and what type of media coverage a company has. Boring companies don't make good news copy, but big expectations do. An example of the former is Insteel Industries (NASDAQ:IIIN), makers of wire reinforcement for concrete used in buildings, bridges, pipes, etc. Over the past year, it has had only 30 news articles listed on Yahoo! Finance, most along the lines of "filed an 8-K," "filed a 10-Q," and "announced a dividend." Yawn. Compare that output to more exciting Cisco (NASDAQ:CSCO) -- 30 articles mentioned this sex kitten within two days.
This doesn't necessarily mean that a boring company will stay out of the news. Peter Lynch's favorite boring company, Waste Management (NYSE:WMI), ran afoul of an accounting scandal in 1999 and was quite newsworthy for a while. The price got hammered. But once the company got the situation straightened out and was back out of the limelight, it continued doing the same boring thing -- collecting garbage. Longleaf Partners, a highly respected value investment fund, increased its holdings by more than 600%, from about 4.7 million shares in 1998 to more than 34 million by the end of 1999. Within two years, it had cut back to about 10 million shares, after riding the price back up for a near double.
As Waste Management demonstrates, boring does not mean lacking in good returns. Insteel Industries has seen its stock price increase by more than 19 times since the beginning of 2004, partly from expectations arising from the highway spending package that Congress recently passed. That might be getting a bit sexy. But frankly, the company has quietly been making money, and that's also reflected in the increased share price. Obviously, Insteel isn't flying below everyone's radar, but how often do you hear a breathless announcer talk about it?
To get market-beating returns, you don't need to own sexy stocks, such as Google (NASDAQ:GOOG), loaded with high expectations. Any doubt or stumble will send such a stock down. When a sexy stock loses its oomph, it can be dangerous to hold. Google seems to have run into some difficulties meeting expectations and has fallen almost 30% from its highs.
Instead, Professor Jeremy Siegel says in his book The Future for Investors that the best companies to hold for long-term wealth creation are the "tried and true" -- what some consider boring. By tracing the history of the original S&P 500 companies from its formation onward, he found that those that consistently beat the market belonged to this club. They included health care, such as Abbott Laboratories (NYSE:ABT) and Bristol-Myers Squibb (NYSE:BMY), and consumer staples, such as Coca-Cola and Colgate-Palmolive (NYSE:CL). Each of these returned an average of at least 15% annually between 1957 and 2003. The best one, Altria Group (NYSE:MO), averaged 19.75% per year. Not boring at all!
On the other hand, according to his research, those who chased sexy stocks rarely did as well. For instance, the technology sector, a famously sexy stock harbor, barely managed to keep up with the index as a whole, and that only because of IBM. The rapid rise of technology companies recently couldn't overcome the tried and true, especially considering how many of the former went under. Each company was touted as being the next big thing (expectations again), but only a select few made it.
For investors who actually want to make money over the long haul, you should keep Siegel's conclusion near and dear to your heart. In a slightly modified form, here it is: If you want sexy, try a Ferrari. But if you want long-term, steady wealth growth, pick the Corolla.
Coca-Cola and Colgate-Palmolive are Motley Fool Inside Value recommendations. Take the newsletter dedicated to getting top-shelf stocks at bargain-basement prices for a 30-day free spin.
Fool contributor Jim Mueller leads a boring life and, so, is well-suited to invest in boring stocks. He did enjoy some excitement, though, when he met Dr. Siegel recently. Jim owns shares of Coca-Cola, Abbott Laboratories, and Insteel Industries. The Motley Fool likes you to know these things.
