- The popular stocks aren’t always the best investments
- Boeing’s fall from grace
- Research studies show underperformance of “most admired” companies
- Stocks that fell in rankings outperformed those that increased
- Beating expectations is easier for despised companies
Introduction: The Dark Side of Popularity
Fortune magazine’s annual list of the “World’s Most Admired Companies” is widely recognized and eagerly awaited by investors and enthusiasts alike. However, recent research suggests that the most popular stocks may not always be the best investments. This revelation challenges the notion that highly admired companies are guaranteed to deliver superior returns. The example of Boeing, once a top-ranked company, serves as a cautionary tale for investors. Let’s delve into the research studies that shed light on this counterintuitive phenomenon.
Main Content: Underperformance of Most Admired Companies
Boeing’s Spectacular Fall
Five years ago, Boeing was ranked among the top 20 companies on Fortune’s “Most Admired” list. Today, the aviation giant is grappling with numerous challenges and has become “the butt of screw-loose jokes.” The decline in Boeing’s stock price, which now trades at less than half of its value five years ago, reflects the disparity between popularity and investment performance.
Research Findings: Underperformance of “Most Admired” Companies
Several research studies have analyzed the performance of companies on Fortune’s “Most Admired” list over extended periods. One such study conducted by Deniz Anginer and Meir Statman found that, on average, the stocks of the least admired companies outperformed those of the most admired companies by 2.1% annually. This unexpected result challenges the assumption that popular companies are better investment options.
Ranking Changes and Stock Performance
Another intriguing finding from the research is that stocks of companies that experienced a decline in their Fortune rankings outperformed those that saw an increase. On average, the former beat the latter by 5.6% annually. This suggests that investors may find better opportunities in companies that are currently out of favor but have the potential for positive surprises.
Why Unpopular Could Mean Better Returns
Beating Expectations: Easier for Despised Companies
One explanation for the outperformance of stocks from despised companies is the concept of beating expectations. Companies that are disliked or undervalued by investors have lower expectations to meet. As a result, surpassing these lowered expectations becomes easier and can lead to positive stock performance. Conversely, companies that are highly admired and have lofty expectations may find it more challenging to exceed those expectations and deliver exceptional returns.
Case Study: Amazon and Kohl’s
Contrarian investment experts, such as Rob Arnott and Que Nguyen of Research Affiliates, caution against blindly following popular stocks like Amazon. They argue that while Amazon ranks highly on Fortune’s list, its valuation is stretched, and its quality metrics are questionable. Instead, they advise considering undervalued companies like Kohl’s, which offers attractive profitability, shareholder distributions, and low leverage. These “boring” companies may present better investment opportunities despite not being in the spotlight.
Conclusion: Rethinking Popular Investments
The research findings suggest that investors should approach popular stocks with caution. The allure of highly admired companies may blind investors to potential pitfalls and cause them to overlook undervalued opportunities. By considering despised or undervalued companies that have the potential to exceed lowered expectations, investors may find better returns. As always, conducting thorough research and due diligence is crucial to making informed investment decisions.