Neglected stocks — I measure it by the ratio of market cap to average dollar volume.  15% of my portfolio is allocated to such stocks, but I would be happy for it to be 50%, if not more. Many of my companies have a single large holder or group — Industrias Bachoco, S.A.B. de C.V. (NYSE:IBA), National Western Life Insurance Company (NYSE:NWLI), CVR Energy, Inc. (NYSE:CVI), and Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B).  These companies have few analysts; there is no way for a brokerage to make money off of them.

Yes, there is a control discount for such companies, because they can’t be taken over, except by the dominant owner.  But if they are well-run, they can be great places to invest.  The dominant investor has his interests aligned with yours over the long haul.  This means that in good and bad times, a large amount of the stock is locked up, and is not available to be bought or sold.  Strong hands hold the stock, which is typically a good place to be.

I like holding cheap, illiquid companies, where there is no hint of financial stress, and they are earning decent money.  I don’t care if they are in dull industries.  If they are compounding their earnings at a decent clip, the stock will eventually catch up.

The point is to own good businesses at good prices.  That’s what I aim to do.

Full disclosure: long BRK/B, CVI, IBA & NWLI

By David Merkel, CFA of Aleph Blog


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