Make headlines with media-shy stocks
Warren Buffett makes Omaha his home, which keeps the billionaire investor safely away from the zaniness that often afflicts Wall Street. But while his distance has its benefits, it also comes with problems. To help stay informed, he is a voracious reader and devours a slew of newspapers each day.
How much value does he derive from that reading? I'm sure he gains insights into industry trends and economic patterns. However, recent research suggests that those applying his methods will likely find their best investing ideas elsewhere, in the places where media attention is rare and press conferences are all but unknown.
If anything, the media spotlight seems to hurt stock returns, according to Lily Fang and Joel Peress in an award-winning 2009 Journal of Finance study.
The two researchers examined all of the stocks traded on the New York Stock Exchange, and 500 additional names on Nasdaq, from Jan. 1, 1993 to Dec. 31, 2002. They tracked the performance of each of the stocks and compared it to the number of times each company was featured prominently in four major U.S. newspapers.
The stocks were sorted into three groups based on the amount of media coverage they received in the prior month. If they hadn't made a prominent appearance in the newspapers, they were put in the no-coverage group. If they received coverage, they were slotted into either a high-coverage group or a low-coverage group based on whether they had more or less than the median number of mentions.
If you invested in the no-coverage category, you would have gained 1.35 per cent on average over the next month. If you stuck to the low-coverage group, you would have fared slightly worse - an average gain of 1.11 per cent in the following month. And if you focused solely on the high-coverage group, you would have been left with a paltry 0.96 per cent gain.
If you're like me, you think in annual terms. The monthly return figures translate into an average return of 12.2 per cent for the highly covered stocks, 14.2 per cent for the low coverage group, and a whopping 17.5 per cent for the no coverage group.
Stocks with no, or low, coverage outperformed in all size and value categories. However, the effects were most pronounced amongst smaller stocks.
For instance, the study split the no-coverage group up three ways by size. The smallest stocks with no coverage sported average annualized returns of 18.3 per cent.
Such returns sound grand, but several of the study's finer points suggest you should approach the results with caution.
For starters, the research has a size bias because it focuses primarily on NYSE-listed stocks, which tend to be large firms. The study sample simply didn't include very many small, or micro-cap, stocks.
However, the decision to stick to larger stocks bolsters the findings because stock market research can flounder when it comes to very small stocks, because of data-related problems. (The authors took several additional steps to check for such issues.)
A more serious issue is the relatively short 10-year period that the researchers examined. The period included the rise and fall of the Internet bubble, which makes it somewhat unusual. As a result, the study's results should be taken with a grain of salt.
Nonetheless, I think it's safe to say that the potential of obscure stocks to deliver stellar returns is better than that of many well-known firms. It's one more reason for brave individuals to scour the dark corners of the market for overlooked gems.
First published in the Globe and Mail, January 25 2013.
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