‘Boring’ stocks generate better returns, study says


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An eternal optimist, Liu-Yue built two social enterprises to help make the world a better place. Liu-Yue co-founded Oxstones Investment Club a searchable content platform and business tools for knowledge sharing and financial education. Oxstones.com also provides investors with direct access to U.S. commercial real estate opportunities and other alternative investments. In addition, Liu-Yue also co-founded Cute Brands a cause-oriented character brand management and brand licensing company that creates social awareness on global issues and societal challenges through character creations. Prior to his entrepreneurial endeavors, Liu-Yue worked as an Executive Associate at M&T Bank in the Structured Real Estate Finance Group where he worked with senior management on multiple bank-wide risk management projects. He also had a dual role as a commercial banker advising UHNWIs and family offices on investments, credit, and banking needs while focused on residential CRE, infrastructure development, and affordable housing projects. Prior to M&T, he held a number of positions in Latin American equities and bonds investment groups at SBC Warburg Dillon Read (Swiss Bank), OFFITBANK (the wealth management division of Wachovia Bank), and in small cap equities at Steinberg Priest Capital Management (family office). Liu-Yue has an MBA specializing in investment management and strategy from Georgetown University and a Bachelor of Science in Finance and Marketing from Stern School of Business at NYU. He also completed graduate studies in international management at the University of Oxford, Trinity College.

By Wallace Witkowski, MarketWatch,

The exciting stocks in your portfolio may not be all they’re cracked up to be as recent research suggests those in more mundane industries may be pulling the weight when it comes to returns.

When all is said and done, stocks in exciting industries, like computer software and pharmaceuticals, have lower returns than banking and utilities stocks, according to a recent working paperfrom the National Bureau of Economic Research, the same organization that determines when U.S. recessions start and end.

A cursory glance at those outlier sectors, as represented by the S&P 500 Index SPX, +0.41%  appears to show that’s the case.

Sector or subsector 12-month performance Average Dividend Yield Average market-to-book ratio
Software 20.5% 0.97% 5.7
Pharmaceuticals 38.8% 1.42% 6.6
Banks -0.4% 2.02% 1.1
Utilities 30.5% 3.26% 2.0

NBER researchers looked at a how much profitability varied between companies in a given industry to determine how salient, or exciting, a given sector was. They found that companies in industries where profitability didn’t vary widely — the boring ones — tended to have lower market-to-book ratios and lower valuations than exciting companies.

When the researchers ran an analysis of the respective companies and compared the returns on equity, they found that while the exciting companies had higher valuations, they tended to have lower returns and lower discount rates.

While the NBER researchers explained that higher valuations could be the result of things like a higher media profile for exciting stocks, or that higher uncertainty about profitability leads to a higher market-to-book ratios, they concluded their analysis supported it’s a simple issue of mispricing.

“Our analysis shows that mispricing can better explain the positive relation between valuation and industry saliency than explanations related to limited attention, uncertainty about mean profitability, and risk,” the researchers noted.

For a more detailed analysis, the full working paper, “Are Firms in ‘Boring’ Industries Worth Less?,” can be found at NBER’s website.

Researchers used the French-Fama 49 classification rather than S&P 500 classification to break down industries:

Top 10: Widest profitability variations by industry
Industry Dispersion Number of companies
Computer software 0.258 116
Pharmaceuticals 0.257 78
Precious metals 0.254 6
Tobacco 0.243 6
Communication 0.211 51
Coal 0.208 5
Computers 0.203 62
Business services 0.195 125
Entertainment 0.191 25
Personal services 0.189 24
Bottom 10: Narrowest profitability variations by industry
Industry Dispersion Number of companies
Fabricated products 0.136 116
Insurance / construction materials 0.135 72 / 83
Trading 0.131 158
Textiles 0.129 28
Candy & soda 0.124 10
Other / Shipping containers 0.123 12 / 19
Aircraft 0.120 16
Business supplies 0.116 33
Banking 0.102 194
Utilities 0.072 142

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