Value Library

The following is an excerpt from the ABC Perspective - October 2003 - Pg. 12

Going Against The Pack

The herd instinct seems to be the strongest human emotion, one that the race is constantly breeding off as the mavericks are liquidated. Happiness is running with the crowd. - John Train

From my experiences the big money to be made in the stock market is when an investor goes against the pack. A specific example of this would be when an investor discovers a stock which is not only undervalued but also is not followed by the mainstream of analysts. Those stocks which are well-followed and over-owned tend to have little appreciation potential especially when everyone already owns them. In fact, if indeed, everyone owns them, who will buy your stock when you want to sell the security?

Going against the pack, in actuality, can lead to excellent profitable opportunities. This is to say that common stocks with little following or publicity of their good value are like " diamonds in the rough". Sir John Templeton, the legendary founder of Templeton Mutual Funds in a recent interview comments on this subject further:

"Over half of the stocks on the NYSE, NASDAQ and the AMEX do not have a single security analyst following them. Others have just one. Regulators have put such pressure on Wall Street research that it has simply been cut back. Listed companies with no analyst following them is a wonderful place to look for opportunities. Stock market orphans have to be better values than companies followed by analysts".

Clearly underfollowed stocks offer superb investment opportunities, albeit, with some incremental risk due to their initial illiquidity. But researching a stock, which is not followed by investment analysts, is not an easy task. Significant investigative research must be undertaken since it is generally not available. But this negative, I believe, presents opportunity especially if a little jewel is unearthed. Moreover, such stocks, I believe, are ripe for capital appreciation potential in that a portfolio manager can accumulate all the shares he may need without any competition and without significantly moving the price. Once the stock becomes known and the first analyst and/or investing institution discover this unpolished gem the share price usually catapults to unprecedented levels. Ultimately the investor's initiative, patience and proaction are well rewarded.

Irwin A. Michael, CFA