To print article, click
Print on your browser's File menu.
Go back
Go back
Posted 1/24/2002
Details
 |
Recent Articles
• 'We're No. 1' usually means 'not much longer', 1/17/02
• Watch the money on the sidelines, 1/10/02
• Hedge your bets when you look for miracles, 1/03/02
more...
|
The Speculator
Companies that speak softly carry big profits
Call them low-key, unassuming or modest, but companies with low celebrity quotients and humble executives often outperform the market by hitting singles and taking careful care of business.
By Victor Niederhoffer and Laurel Kenner
Where are the humble companies that correspond to Sparky Anderson in baseball, Walter Payton in football, Mike Krzyzewski in basketball and Wayne Gretzky in hockey? Companies with executives who could say, as Anderson did: "My daddy told me, ‘Son, be nice to everyone you meet -- be nice and treat that person like he's someone.' "
| New
stock picks from market professionals every day on CNBC. |
We found just 10 of these companies after searching through hundreds of thousands of articles published over the past three years, looking for conjunctions of "CEO" with such words as "low key," "down-to-earth," "modest" and "unassuming." They are Allstate (ALL, news, msgs), AOL Time Warner (AOL, news, msgs), Biomet (BMET, news, msgs), Computer Associates (CA, news, msgs), Costco Wholesale (COST, news, msgs), Electrolux (ELUX, news, msgs), Lockheed Martin (LMT, news, msgs), Wal-Mart Stores (WMT, news, msgs), Weyerhaeuser (WY, news, msgs) and White Mountains Insurance (WTM, news, msgs). We compared their stock performance with that of the S&P 500 ($INX) from the dates of various statements containing the key words, and it turns out they outperformed the market by 40 percentage points.
These companies have advanced not for their home runs, but because of their singles. They attended to details and achieved their goals with quiet perfection. We speculate that they will perform better than a corresponding group of companies -- Priceline.com (PCLN, news, msgs), Gateway (GTW, news, msgs), Sprint PCS (PCS, news, msgs), Human Genome Sciences (HGSI, news, msgs), Rational Software (RATL, news, msgs), LaSalle Hotel Properties (LHO, news, msgs), Delta Air Lines (DAL, news, msgs), Continental Airlines (CAL, news, msgs) and Dell Computer (DELL, news, msgs) -- that we characterized as boastful in our Jan. 11 article, "We're No. 1 usually means ‘not much longer.'" (We asked readers to suggest other boastful companies, and they were quite forthcoming. Suggestions included Oracle (ORCL, news, msgs), Sun Microsystems (SUNW, news, msgs), Tyco (TYC, news, msgs), the now-bankrupt Sunbeam and IKON Office Solutions (IKN, news, msgs).)
Humble companies have been getting some attention lately, helped by a James C. Collins' book, "Good to Great: Why Some Companies Make the Leap...and Others Don't." Collins found 11 companies -- Abbott Laboratories (ABT, news, msgs), Circuit City (CC, news, msgs), Fannie Mae (FNM, news, msgs), Gillette (G, news, msgs), Kimberly-Clark (KMB, news, msgs), Kroger (KR, news, msgs), Nucor (NUE, news, msgs), Philip Morris (MO, news, msgs), Pitney Bowes (PBI, news, msgs), Walgreen (WAG, news, msgs) and Wells Fargo (WFC, news, msgs) -- that had the kind of down-to-earth, attention-to-detail style that turned them into great companies.
He found that their returns were seven times that of the market in the 15 years after their transition to greatness. One dollar invested in the good-to-great companies in 1965 would have grown to $471, versus a 56-fold increase in the market.
So much for celebrity
The CEOs of these companies are invariably self-effacing. "There is a direct relationship between the absence of celebrity and the presence of good-to-great results," Collins said in an interview published in the October 2001 edition of Fast Company. "Why? First, when you have a celebrity, the company turns into 'the one genius with 1,000 helpers.' It creates a sense that the whole thing is really about the CEO. At a deeper level, we found that for leaders to make something great, their ambition has to be for the greatness of the work and the company, rather than for themselves."
Much has been made of Collins' scientific, painstaking method of research. The book was five years in the making and involved 21 researchers whom Collins affectionately calls chimps. It took six months and vast banks of computers just to come up with the companies. We would point out that since Collins selected the companies for their superior market performance in the first place, of course they displayed it. There is thus no prospective evidence, no scientific finding, indeed no reason whatsoever aside from anecdotes to believe that leaders or companies showing these characteristics would perform any differently in the future than a randomly selected bunch of companies.
"Good to Great" was published in October 2001, and there probably was no chance to change the selection of companies after June 2001. The Speculator took pencil to paper and calculated the performance of these companies from the end of June through Jan. 17, as follows:
'Good to Great' companies
Stock performance since June 29, 2001
| Company | % Chg |
| Abbott (ABT, news, msgs) | 21 |
| Fannie Mae (FNM, news, msgs) | -2 |
| Gillette (G, news, msgs) | 12 |
| Kimberly-Clark (KMB, news, msgs) | 5 |
| Kroger (KR, news, msgs) | -18 |
| Nucor (NUE, news, msgs) | 4 |
| Philip Morris (MO, news, msgs) | -3 |
| Pitney Bowes (PBI, news, msgs) | -6 |
| Walgreen (WAG, news, msgs) | 3 |
| Wells Fargo (WFC, news, msgs) | -3 |
The average performance of the 10 companies -- half up and half down, close to unchanged on average -- is very much in line with the market during the period. True, the S&P 500 was down some 7% during that time. But non-technology companies of the nature chosen showed results quite consistent with the "good-to-great" companies. (Oh yes, we took out Circuit City, the electronics retailer, which rose 58% during the period, the same way that the researchers would have taken out the performance of companies like Polaroid (PRDCQ, news, msgs) and Xerox (XRX, news, msgs) that seemed great and down-to-earth during the period but then stumbled, as an antidote to this type of retrospective classification in the future.)
We would like to believe that the performance differences will hold up. There is something ugly and unbusinesslike about the tendency to talk about how much better than others you are, rather than stay focused on your own pursuit of excellence. But there is certainly not enough evidence in the group of humble companies we have selected to carry the point.
Just what is humble?
The problem, as one of our biotech researchers, W.J. Egan, points out, is that "finding indications of humility is more difficult than finding indications of arrogance. Many different things can be said which indicate humility, but arrogance seems to be found when certain specific types of things are said."
Our friend the English chess grandmaster Nigel Davies points out that the greatest natural chess player of all time, Jose Raul Capablanca, world champion from 1921-1927, once said, "As one by one I mowed them down, my superiority became evident," Davies commented: "Was this hubris? Probably more a statement of fact. I am much more wary of apparent humility than apparent hubris. Those who feign humility can be both arrogant and deceitful."
Yes, precisely. The one company with by far the most mentions for humility in the search engines is Berkshire Hathaway (BRK.A, news, msgs). But it was just two years ago that Warren Buffett, Berkshire's CEO, told a gathering of venture capitalists that since so few of the aircraft companies survive in their original form, "I like to think that if I'd been at Kitty Hawk in 1903 when Orville Wright took off, I would have been farsighted enough and public-spirited enough -- I owed this to future capitalists -- to shoot him down."
Buffett and the "good-to-great" executives look great during a period like the last two years, when the Nasdaq fell 60%. But the $64,000 question is, which group will perform better in the future?
To answer the question, we are taking a page from the FDA playbook. We will conduct a double-blind study tracking the performance of all three groups for three months beginning Jan. 31. We will be adding Oracle and Sun to our list of boastful companies, and readers are encouraged to send more "patients" for either the humble or hubristic list to our offices by e-mailing dciocca@bloomberg.net.
End notes:
In performing our studies of humble and boastful companies, we relied heavily on our research assistants, Patrick Boyle and Robert Wincapaw. Their table on humble companies is being posted on the SuperModels General Message Board. We thank reader Mark Mahorney for finding the Sparky Anderson quote and for kindly posting a number of items on humility on his site at http://www.greatspeculations.com/....In our Jan. 3 column, we recommended the purchase of a group of seven biotech stocks, hedged by shorting an indexlike security called Biotechnology Holdrs (BBH, news, msgs) for a value 25% greater than the market value of the longs (i.e., a $10,000 stock purchase would be hedged by $12,500 of the BBH). The portfolio is down 8.3%, offset by a 6.25% gain on the short. As we write, the market is at a 45-day low, which is exactly the time we like to take a little speculation from the long side. We are therefore recommending the unwinding of the hedge -- i.e., covering the short -- on the BBH.... Our series on hubris and humility has elicited many erudite and useful responses from readers, and we hope more will come in the future. We will post these on the SuperModels General Message Board. We will also post a link to our humble and boastful portfolios on that site, beginning Jan. 31....On Dec. 20, we enumerated the results of buying IBM (IBM, news, msgs) at a "bargain price" of down 3% on the day. We pointed out that the event occurs about once a month, and that on average it's good for about a half-percent bounce in the next two days. We received about 800 requests for a workout of the results. We believe in eating our own cooking, so we purchased IBM at the close on Friday, when it fell 5%, and again on Tuesday, when it declined 3% more. We will hold until a rally, or until Friday, Jan. 25. We have expanded our IBM system to take account of big moves over the previous two and three days, and are pleased to offer this to readers who write in for it, especially those who add to our halls of fame for boasting and humble pie.
At the time of publication, neither Laurel Kenner or Victor Niederhoffer owned any of the stocks mentioned in this column.
MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.