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February, 2003


It turns out that, perhaps surprisingly, the stocks that are most in the limelight, most followed by analysts, and most recommended do not generally perform with healthy total returns as well as the shares of relatively neglected companies.

For example, while over the past three years stocks in the Standard and Poors 500 have gone down roughly 40%, the smaller, more neglected companies' stocks have actually been up during the same period.

This tendency is dramatic when one examines the Nasdaq and the Wilshire 5000. Per the November, 2002, issue of "AAII Journal," while the Nasdaq Composite index (heavily weighted for large-cap stocks) had been down, in 2002 alone, over 39% prior to AAII's 11/02 publication, the merely average stock on the Nasdaq was up over 30% (and had been up each of the last three years).

The ten year return of the average (that is, unweighted by market capitalization) Wilshire 5000 stock, again as of that AAII printing, was 276.3% (a compound annual return of 14.17%), despite the 2000-2002 bear market.

During the same ten year period: micro-cap stocks provided compound annual returns averaging 13.54% a year; REITs, 12.69%; and small-cap value stocks, a whopping 14.82%. All of these compare favorably with the more prominent and large-cap S & P 500 index, which returned 10.31% a year in that decade.

Selecting for micro-cap, small-cap, or average stocks, rather than well followed large-cap ones, is just one way to focus on generally higher performing neglected holdings. It is useful also to screen out equities with more than 15% institutional ownership. The lower the level of ownership by large institutions, the fewer the number of analysts likely to be following the security. The ordinary individual investor thus has an advantage when searching for value among such relatively undiscovered stocks.

The American Association of Individual Investors (AAII) makes easier the search among less well known stocks by annually, near the beginning of the year, publishing its list of "shadow stocks." This year there are 159 securities so listed, 44 of them new to the list this year.

Among these I have selected five that I think are good bargains. Each has reasonably low price to earnings (P/E), price to sales (P/S), P/E to earnings per share growth (PEG), all value criteria, and low debt to equity as well as a low dividend payout ratio (if the asset pays a dividend), both margin of safety criteria.

Past results are, of course, no guarantee of future returns, but such assets as these, when held for the long-term, have excellent prospects for performance superior to the major market averages, and with lower risk.

CompanyAero Systems
Labs, Inc.
Lumber Co.
Dividend %00.501.4
Payout RatioN.A.N.A.6.9%N.A.18.7%
Mkt. Cap.17.1M40.4M206.4M64.4M40.9M


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

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