Buy What You Hate

Peter Lynch used to advise investors to “buy what you know.” Several months ago, Daniel Gross wrote an article called “Buy What You Hate.” He noticed how many highly-profitable companies did poorly in a poll on corporate reputation.
The head of the poll said, “When we do detailed analysis of public perception, we find that a significant portion of the ranking is negatively affected when companies do too well.” I guess the public is pro-profits, but anti-profiteering. But I’m not sure where the line is drawn.
A new study pushes this idea further. It finds that stocks of admired companies haven’t fared as well as the less-admired. “Stocks of Admired Companies and Despised Ones” by Deniz Anginer, Kenneth Fisher and Meir Statman looks at the stock performance of companies in Fortune Magazines poll of most admired companies (BTW, UnitedHealth was ranked #1 in the 2006 survey).
The researchers found that over a 23-year stretch, the stocks of companies in the lower half of reputation (the despised companies) outperformed the admired half, 17.50% to 15.68%.
Before you go out and load up on shares of Initech (BOBS) or Tyrell Corp. (REPL), making money with this type of strategy isn’t so easy. CXO Advisory writes:

Relative returns of the stocks of admired and despised companies vary considerably from year to year and even from decade to decade. During 1983–1995, the mean annualized return of the most admired (top 10%) is 9.9% higher than that of the most despised (bottom 10%). But during 1996–2006, the mean annualized return of the most despised is 9.2% higher than that of the most admired. Overall, during 1983-2006, the mean annualized return of the most despised is 4.0% higher than that of the most admired. Moreover, the effect is not reliably consistent across the spectrum from most admired to most despised.

Posted by on February 15th, 2007 at 11:41 am


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