With visions of getting rich fast, many investors seek out ‘hot’ stocks, despite the risk. Some experts call this the “lottery effect” – going for the big win despite small odds of the “ticket” actually paying off.
Biotechnology Stocks in search of treatments for high profile diseases can find their way into the heap of discarded lottery tickets. Two stocks on the ASX come to mind. The first is Prana Biotechnology (PBT) once a red-hot stock with the promise of becoming the first company on the planet to develop a treatment for the scourge of the Baby Boomers – Alzheimer’s disease. The second is Mesoblast Limited (MSB) a company with a promising adult stem cell technology with potential applications to a wide range of issues, from cardiac disease, oncology, hematology issues, and spinal and musculoskeletal issues.
Our first comparison will rely on one of the most successful “boring” stocks anywhere – a US based company called Fastenal (Nasdaq GS: FAST). The company has been trading publicly since 1990 and makes nuts and bolts. How exciting are nuts and bolts and the other related fastening products and tools the company offers?
The following chart compares the share price performance of “boring” Fastenal against “hot and exciting” Prana Biotech.
The chart illustrates one of the hallmarks of many “lottery ticket” stocks – volatility.
To look at Mesoblast’s performance we will use arguably one of the most “boring” stocks on the ASX – InvoCare Limited (IVC), a company dedicated to the care of the deceased. InvoCare operates traditional funeral locations and crematoria throughout Australia and New Zealand as well as in Singapore. Here is how Mesoblast stock performed in comparison to InvoCare’s.
InvoCare is like the tortoise from Aesop’s fable, while Mesoblast, like the Hare, surged into a big lead five years back, only to fall by the wayside in the long run. Here is a price comparison for the two over the last five years.
Some “lottery” ticket stocks do payoff in the long run. Sirtex Medical Limited (SRX) has been working on innovative treatments for liver cancer for more than a decade. Investors excited by the lure of effective cancer treatments have done well with this one. Here is price performance chart for SRX compared to InvoCare.
Note, however, the ride to the top has seen significant bumps along the way.
For other “boring” stocks on the ASX we decided to look at the exciting world of auto and truck sales and automotive parts. The following table begins with InvoCare and adds the historical performance of three ASX automotive stocks in business for more than ten years.
As always, past performance is no guarantee of future gains, so the question becomes can the “boring” stocks in our table continue to reward their investors?
InvoCare’s business may be morbid, but death is not subject to economic cycles. The growth in the death rate in the company’s principal market – Australia and New Zealand – has averaged 1% over the past 60 years with Australia’s bureau of Statistics predicting the death rate will continue to grow, topping out at 2.8% in 2032 before receding back to 1% by 2055. Statistics New Zealand sees growth in the death rate there topping out at 2.32% by 2032.
If there is any excitement at all to this stock it is the indisputable fact that although people may be living longer, eventually we all die. In short, the market for InvoCare’s service is literally never-ending. In addition, the company is already embarked on a growth through acquisition strategy. In 2014 InvoCare entered the massive US market in that country’s most populous state – California – when it acquired the assets of Macera Crematorium. Investors have been moderately disappointed in the US results, as the combination of acquisition costs and higher than expected operating costs produced a $3.8 million dollar loss in EBITDA (Earnings before Interest Taxes Depreciation and Amortisation) in FY 2015. For FY 2015 the company reported Earnings per Share (EPS) of $0.476 which is forecasted to increase to $0.541 by FY 2017, a 25% increase. InvoCare has a current Dividend Yield of 2.8%, fully franked. Dividends per share of $0.38 paid in FY 2015 are expected to increase to $0.464 by FY 2016, a rise of 22%.
Automotive Holdings Group Limited (AHG) began trading on the ASX on 2 November of 2005, opening at $1.00 and dropping to $0.37 at the close. By 2009 the company had grown to eight automotive dealerships across Australia and New Zealand and expanded its business model to include cold storage transportation and other logistics capabilities. In 2011 Automotive Holdings added a diesel truck operation to its stable as well as a parts business to serve not only the automotive sector, but mining and industrial businesses as well. Trucks and buses came in 2012 with AHG joining the ASX 200 in 2013. The company now has 108 dealerships.
The stock price has had a rough first half of the trading year, with its parts and logistics business suffering, largely due to problems in the resource sector. In addition, the falling AUD means it costs the company more to import cars. AHG has a current fully franked dividend yield of 5.2% with the FY 2015 dividend payment of $0.22 forecasted to grow to $0.247 by FY 2017. EPS for FY 2015 came in at $0.307 and is expected to increase to $0.335 by FY 2017.
AP Eagers Limited (APE) is a broadly diversified automotive company, offering both new and used cars, parts, accessories and car care products as well as vehicle repair and servicing. The company also offers financing and leasing and extended warranties.
AP Eagers ten year performance record for its shareholders is beyond amazing. An average annual rate of total shareholder return of 30% over ten years beats the performance of two of the most acclaimed stocks on the ASX – blood plasma and vaccination developer and distributor CSL Limited (CSL) and hospital operator Ramsey Healthcare (RHC). Here are the numbers for the two companies.
AP Eagers, like Automotive Group, has grown through an aggressive acquisition strategy which has yet to slow down. Twice this year the company has upgraded its guidance for FY 2016, with both revenue and profit to reach record levels. AP Eagers has paid dividends in each of the past seven years, with FY 2016 in line to be the eighth. In FY 2013 the company paid a dividend of $0.23 which jumped almost 40% by FY 2015, paying $0.32 per share. In the same period EPS rose from $0.356 in 2013 to $0.503 by FY 2015, a rise of 41%.
ARB Corporation (ARB) is arguably the most boring of the bunch. The company designs, manufactures, and sells 4×4 and light duty vehicle accessories. While to some the product line may seem boring, the company’s history is anything but. Its founder was an avid 4×4 enthusiast constantly roaming the rough roads in the outback. Anthony Rogers Brown began working in his garage to produce more durable accessories for 4×4’s, later using his initials to name his company – ARB.
The company has manufacturing facilities in Australia and in Thailand and exports its products to approximately 100 countries around the world. Exports currently account for about 25% of the company’s revenue. That is expected to grow as ARB is moving into the US market. The company has sales and distribution facilities in Prague and Dubai for planned penetration of the Eastern European and Middle Eastern markets.
This is a company that has grown organically and the demand for its products is strong here and around the world. In Australia 4WD and SUV sales account for 50% of total vehicle sales. The company’s EPS for FY 2015 was $0.576 with FY 2017 EPS expected to be $0.714, an increase of 24%. Dividend payments increased 26% over the same period.
Newcomers to share market investing quickly discover the advice from legendary investors like Warren Buffet and Peter Lynch to “buy what you know.” Another way to frame that bit of advice is to buy what you can understand. Many biotechnology and high tech stocks involve complex technology, beyond the easy comprehension of most retail investors. With hard work and a road map of understandable things to look for – like potential market share and competitive companies – investing in exciting stocks can make some sense, although the inherent risk should never be minimized. Boring stocks, on the other hand, operate in easily understandable business sectors.